Strategies, analysis, and news for FX traders

January 2010
Volume 7, No. 1

IS THE DOLLAR INTERVIEW:

rally for real? p. 12 Thomas Stridsman p. 30

THE YEAR AHEAD CURRENCY CARRY

in currencies p. 8 and yield-curve
trading p. 24
THE TURTLE SYSTEM
for FX p. 18
 CONTENTS

Advanced Strategies
Currency carry and yield-curve trading . .24
Contributors . . . . . . . . . . . . . . . . . . . . . . . . . . .6 Examining the currency-bond connection.
By Howard L. Simons
Global Markets
Forex 2010 . . . . . . . . . . . . . . . . . . . . . . . . . .8 Currency Trader Interview
A look at the key themes poised to drive the Thomas Stridsman puts
currency market in the coming year. research to work . . . . . . . . . . . . . . . . . . . .30
By Currency Trader Staff System designer applies principles in
currencies and commodities.
By Currency Trader Staff
On the Money
Bees in the bonnet . . . . . . . . . . . . . . . . . .12 continued on p. 4
Does the dollar’s new uptrend have legs?
By Barbara Rockefeller

Trading Strategies
The Turtle system:
Forex performance analysis . . . . . . . . . . .18
Testing the original Turtle trading rules in
today’s currency market.
By Daniel Fernandez

2 January 2010 • CURRENCY TRADER

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 CONTENTS

Currency Futures Snapshot . . . . . . . .34

International Markets . . . . . . . . . . . . . .36

Numbers from the global forex, stock,
and interest-rate markets.

Global Economic Calendar . . . . . . . . . .39

Important dates for currency traders.

Key concepts . . . . . . . . . . . . . . . . . . . . .40

Events . . . . . . . . . . . . . . . . . . . . . . . . . .40
Conferences, seminars, and other events.
Forex Journal . . . . . . . . . . . . . . . . . . . . .43
New products & services . . . . . . . . . . .42 Right on one dollar, wrong on the other.

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Submit your editorial queries or comments to

webmaster@currencytradermag.com.

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 CONTRIBUTORS
CONTRIBUTORS

 Howard Simons is president of

A publication of Active Trader ® Rosewood Trading Inc. and a strategist for
Bianco Research. He writes and speaks fre-
For all subscriber services:
www.currencytradermag.com quently on a wide range of economic and
Editor-in-chief: Mark Etzkorn financial market issues.
metzkorn@currencytradermag.com

Managing editor: Molly Goad

mgoad@currencytradermag.com  Barbara Rockefeller (www.rts-forex.com) is an inter-

Contributing writer: Chris Peters

national economist with a focus on foreign exchange. She
cpeters@currencytradermag.com has worked as a forecaster, trader, and consultant at Citibank
and other financial institutions, and currently publishes two
Contributing editor:
Howard Simons daily reports on foreign exchange. Rockefeller is the author
of Technical Analysis for Dummies (For Dummies, 2004), 24/7
Contributing writers:
Barbara Rockefeller, Marc Chandler Trading Around the Clock, Around the World (John Wiley &
Sons, 2000), The Global Trader (John Wiley & Sons, 2001), and
Editorial assistant and
webmaster: Kesha Green How to Invest Internationally, published in Japan in 1999. A
kgreen@currencytradermag.com book tentatively titled How to Trade FX is in the works.

Art director: Laura Coyle

Rockefeller is on the board of directors of a large European
lcoyle@currencytradermag.com hedge fund.

President: Phil Dorman

pdorman@currencytradermag.com

 Daniel Fernandez is an active trader

Publisher,
Ad sales East Coast and Midwest: with a strong interest in calculus, statistics,
Bob Dorman and economics who has been focusing on the
bdorman@currencytradermag.com
analysis of forex trading strategies, particu-
Ad sales larly algorithmic trading and the mathemat-
West Coast and Southwest only:
ical evaluation of long-term system profitability. For the past
Allison Chee
achee@currencytradermag.com two years he has published his research and opinions on
his blog “Reviewing Everything Forex,” which also
Classified ad sales: Mark Seger
seger@currencytradermag.com includes reviews of commercial and free trading systems
and general interest articles on forex trading (http://fxre-
Volume 7, Issue 1. Currency Trader is published monthly by TechInfo, Inc.,
161 N. Clark St., Suite 4915, Chicago, IL 60601. Copyright © 2009 TechInfo, views.blogspot.com). Fernandez is a graduate of the
Inc. All rights reserved. Information in this publication may not be stored or
reproduced in any form without written permission from the publisher. National University of Colombia, where he majored in
The information in Currency Trader magazine is intended for educational pur-
poses only. It is not meant to recommend, promote or in any way imply the
chemistry, concentrating in computational chemistry.
effectiveness of any trading system, strategy or approach. Traders are advised
to do their own research and testing to determine the validity of a trading idea. He can be reached at dfernandezp@unal.edu.co.
Trading and investing carry a high level of risk. Past performance does not
guarantee future results.

6 January 2010 • CURRENCY TRADER

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 GLOBAL MARKETS
Forex 2010
Who will hike first, by how much, and when?
Interest rates and the retraction of the massive global financial stimulus will likely dominate
the forex market in coming months.
FIGURE 1 — THE FIRST TO HIKE
The Royal Bank of Australia was the first major central bank to
raise interest rates after the cycle of deep, coordinated rate cuts
that dominated 2008 and most of 2009. The Aussie dollar came
close to its pre-sell-off high before pulling back in November.
Source: TradeStation
FIGURE 2 — DOLLAR ON THE REBOUND?
After giving back most of its 2008 gains in 2009, the U.S. dollar
staged a rally in the final month of 2009.
Source: TradeStation
8 January 2010 • CURRENCY TRADER
BY CURRENCY TRADER STAFF
A
s the door closed on 2009, most econo-
mists argued the global economy was
recovering — reflected in forecasts of
global economic output in the 3.1-3.8 percent range
for 2010. Some areas of the world, primarily
emerging market nations and commodity-export-
ing countries, are expected to continue to lead the
way out of the Great Recession, while industrial-
ized countries such as the U.S., Japan, and the
Eurozone, are expected to struggle a little more.
This will likely drive fresh themes in the foreign
exchange market in 2010 as traders get back to the
business of monitoring growth and interest-rate
differentials. In reviewing some of the key vari-
ables that could drive the forex market in the
months ahead, one looms especially large.
“We are looking to see how central banks will
pull out of the extraordinary stimulus they have
been providing,” says Steven Englander, chief cur-
rency strategist for the Americas at Barclays
Capital. “In the past six weeks, markets have again
become sensitive to interest-rate differentials.”
Return to rates
For much of 2009, however, those differentials
didn’t drive forex markets. Instead, factors such as
safe-haven dollar buying, risk appetite, and risk
aversion drove currency trends. In the weeks and
months ahead, currency traders might begin refo-
cusing on more “traditional” forex drivers, includ-
ing the monetary policy rates set by global central
banks.
The U.S. remains one of the most accommoda-
tive nations in terms of monetary policy, with its
fed funds rate set at zero to 0.25 percent. The Fed
is scheduled to meet next on Jan. 27, but policy
watchers expect no rate change to emerge from
 FIGURE 3 — NEAR-TERM DOLLAR EDGE

that meeting. The European Central Bank (ECB), A Fed quicker to hike rates than the ECB would lay a bullish
foundation for the dollar vs. the Euro in 2010, but longer-term the
which meets on Jan. 14, is expected to maintain its
buck could come under pressure.
1-percent lending. Rounding out the G3, Japan’s
rate lies at 0.10 percent, and given the slow growth
and deflationary conditions Japan still faces, mar-
ket watchers say it could be years before it hikes
rates.
Broadening the focus to the G10, Australia was
the first major industrialized nation to hike rates in
2009. With the Australian rate currently at 3.75 per-
cent, market watchers expect additional tightening
at the Feb. 2 Reserve Bank of Australia meeting.
Forex traders are likely to continue focusing on
who’s hiking when and how high, and reward the
currencies with higher rates via long positions. The
Aussie dollar (AUD) mounted a huge rally off its
February-March bottom before pausing in
November (Figure 1).
Nonetheless, all eyes will be on the U.S. Federal Source: TradeStation
Reserve in the months to come, with traders sifting
through every Fed speech and announcement for clues “We think the market will begin to price in a Fed rate
about when the Fed will shift on rates. hike,” he explains. “[However], once it is clear the pace of
Fed tightening will be moderate, the dollar will come under
Varied Fed forecasts pressure.” The bank’s 12-month EUR/USD target is 1.4500.
Views are mixed on the when the U.S. Fed will begin to hike Barclays forecasts a 1-percent Fed funds rate by the end
rates, but many market watchers have turned friendly on of 2010. Englander notes that still means “real interest rates
the U.S. dollar, which rallied in the final weeks of 2009 after are going to be negative.” (Real interest rates are simply the
selling off for the majority of the year (Figure 2). interest rate minus the inflation rate.)
Wells Fargo economist Sam Bullard stresses the height- Michael Woolfolk, managing director at BNY Mellon,
ened focus on the Fed. “All the attention is on when they voices an even more aggressive forecast — a 1.50-percent
will implement an exit strategy,” he says. “Timing is such a Fed funds rate by the end of the year. He believes the Fed
key thing in this recovery.” will begin to signal it is concerned about asset price bubbles
Wells Fargo forecasts a moderate 2.2-percent U.S. GDP and potential inflation in the next couple of months.
increase in 2010 — which is considered to be a “sub-par” “In February and March, we’ll likely hear it from FOMC
pace, Bullard notes. members, speaking between meetings,” he says.
“It is the composition of the growth and the pace that is
going to be disappointing to many people,” he says. “The G3 vs. everyone else
recovery in the U.S. is not strong enough to have a sharp v- Growth differentials should be another key driver in the FX
shape. Firms are not aggressively hiring.” arena in 2010, especially the different economic challenges
Bullard says Wells Fargo doesn’t expect the Fed to tight- facing the G3 countries vs. the other G10 countries. The G3
en rates until the fourth quarter of 2010, and the total countries (U.S., Eurozone, and Japan) “all have major fiscal
increase in the Fed funds rate to be 0.50 percent for the year. issues,” Englander says. “These countries have been liquid-
Meanwhile, Barclays Capital has a slightly more aggres- ity providers, and looking ahead they will be more focused
sive forecast, as they expect the Fed to hike rates toward the on trying to stimulate growth. It is going to be a long time
end of the third quarter. By comparison, Barclays expects until they recover, and the U.S. is far from being out of the
the ECB to hold off on raising rates until the beginning of woods.”
2011. “The advanced economies most involved in the capital
That translates into a “dollar bullish” outlook for much of markets system will have a more sluggish recovery,”
2010, Englander notes. The bank has a six-month Euro/U.S. Bullard adds.
dollar (EUR/USD) target of 1.4000 (Figure 3). continued on p. 10

CURRENCY TRADER • January 2010 9

 GLOBAL MARKETS

FIGURE 4 — THE CARRY TRADE: DOLLAR OUT, YEN IN

Factors in favor of the dollar and against the Japanese yen have
led some analysts to look for gains in the dollar/yen pair this year.
take into account output gaps in Europe and
Japan,” Englander says. “There is already more
excess capacity in the G3 than in emerging markets
right now.” This factor goes back to the inflation
picture, because excess capacity is helping to keep
down inflation in the U.S. and other G3 countries.
Englander also notes emerging markets are way
ahead of the G3, emerging from recession faster
and in a stronger position. And other G10 coun-
tries, such as commodity exporters Australia, New
Zealand, Canada, and Norway, “didn’t let their fis-
cal positions blow out like the G3,” Englander says.

Return to the yen carry

Another potential shift in the forex markets this
year is a change in the carry-trade currency. The
U.S. dollar, with its extremely low interest rates,
became a leg in the carry trade last year as money
Source: TradeStation managers borrowed the greenback to finance riski-
er and potentially higher-yielding trades.
FIGURE 5 — GO CANADA However, with the specter of Fed tightening loom-
ing over the forex market in 2010 at some point,
The Canadian dollar could be poised to show relative strength vs.
analysts say expectation is enough to shift carry
its U.S. cousin.
trade action back to the Japanese yen, where rates
are expected to remain low for some time to come.
“Among our key FX market themes for 2010 are
a continued U.S. dollar recovery, a return of the
Japanese yen and the Swiss franc to the status of
‘carry trade’ currencies, a shift to a policy of ren-
minbi (yuan) strength, and greater differentiation
between emerging market currency performance,”
wrote Nick Bennenbroek in the December “Wells
Fargo FX Express Monthly.” He pinpointed a
$1.32 12-month target for EUR/USD pair.
Forex strategist at BNP Paribas Sebastien Galy
agrees.
“We think a side effect of monetary tightening
will be that the dollar will be less cheap to fund
with,” he says. “Over the year, we see a broad
Source: TradeStation strengthening of the dollar. The yen is a better
funding currency. Japan is a deep underperformer
Meanwhile, Englander notes, “the rest of the world is to Asia; they are in deep trouble, in a deflationary spiral,
shifting its focus to prevent inflation from rebounding.” and there is absolutely no reason to hike anytime soon.”
Barclays forecasts average G3 GDP growth in 2010 at
roughly 2.8 percent vs. a 4.6-percent forecast for Latin A dollar bottom?
America and a 6.6-percent pace for Asia. Many analysts have begun to turn bullish on the U.S. dol-
That compares to Wells Fargo’s 2010 GDP forecasts for lar.
China at 8.8 percent, India at 8.1 percent, Brazil at 2.8 per- “A definitive multi-week bottom for the U.S. dollar
cent, Korea at 5.2 percent, Mexico at 2.8 percent, Japan at 2.3 (USD) looks to be in place. The key to the story is that rela-
percent, the UK at 1.7 percent, and the Eurozone at 1.9 per- tive growth momentum and yields are shifting back in the
cent. USD’s favor,” strategists wrote in “Westpac’s Top Trades
“Those are real differences in growth and that doesn’t for Q1 2010.” One of these trades is to go long the U.S. dol-

10 January 2010 • CURRENCY TRADER

 FIGURE 6 — INDIAN INFLATION STORY
India could let its currency appreciate to keep inflation down.

lar index (DXY) at 75.60-76.90, with a target at

80.00 and a stop at 74.90.
Analysts at BNP Paribas also see upside
potential for the dollar. Their 2010 “FX Trading
Ideas” report cited buying the dollar/yen pair
(USD/JPY) with a target at 110.00 as their top
trade (Figure 4). BNP analysts wrote: “We
believe the USD will rally throughout 2010,
while the JPY will be the outright underper-
former. Over the past year the USD was the
funding currency of choice for carry trades and
speculative investment in higher risk assets.
However, we expect this to change for the com-
ing year, with the yen regaining its historical
funding currency status. Japan will remain Source: www.advfn.com
locked in deflation, implying that Japanese
rates will remain low and the currency weak.” FIGURE 7 — A BUDGET WON?
The Korean won has been described as “cheap” at current levels.
Other FX winners
Shifting over to other potentially “hot” curren-
cies in the year ahead, a number of commodity
exporting nations and emerging market coun-
tries made the top of the list. Englander says the
Canadian dollar has room to appreciate in the
months ahead (Figure 5).
“We see about 6 percent appreciation in the
Canadian dollar vs. the U.S,” he says. “We like
Canada — we expect it to be below parity (1.00)
within a year’s time.”
Independent forex economist Charmaine
Buskas agrees the Canadian dollar is worth
watching.
“The long-term fundamentals look positive, Source: www.advfn.com
and given the amount of evidence pointing to the
fact the global recovery will continue to gather traction, it’s [will help] demand for Canadian exports. Again, this will
the long-term outlook that is going to become increasingly support the Canadian dollar.
important in the year ahead,” Buskas says. “The fact the “Dollar/Canada (USD/CAD) has already made its way
Canadian government does not face the kind of deficits that down to $1.04 [in late December], and that’s in thin holiday
have swollen the government’s balance sheets in the U.S. markets. When markets get going again and liquidity and
and UK bodes well for the Canadian dollar.” players come back to their desks, the pair has the potential
Buskas explains another factor that could help the to head back down to parity,” Buskas adds.
Canadian dollar is, ironically, better prospects for the U.S. Another commodity exporting country to keep an eye on
“The recovery in the U.S. is getting some wind at its is Norway, according to Englander. “Norway should do
back,” she says. “The tone of both business and consumer- extremely well,” he says.
related sentiment continues to improve as the economy
improves. This means whatever safe-haven bid the U.S. Emerging currencies
dollar had in previous months will continue to come off, In the stronger emerging-market and G10 countries,
and that should benefit the Canadian dollar. Moreover, as growth and valuation stories are developing, which should
companies in the U.S. and other countries continue to face support appreciation in their currencies in the year ahead.
improving demand, they will need to restock their shelves Englander lists Korea, Indonesia, and India (Figure 6) as
and start to slowly rebuild their inventories, which have countries to watch.
been very tightly managed in the past months. As such, this continued on p. 41

CURRENCY TRADER • January 2010 11

 ON THE MONEY

Bees in the bonnet

The U.S. interest-rate story is driving the dollar, for good or ill.
BY BARBARA ROCKEFELLER

T
raders sometimes get a single bee in their bon-
net and focus on it to the exclusion of every-
thing else. Today the interest-rate cycle turning
point is one of those bees. The forex market is
following the money market in believing the Fed will raise
rates as early as June. It doesn’t matter if this is good eco-
nomics or even a reasonable expectation, given Bernanke’s
reluctance to move prematurely. It’s enough that the bee
started buzzing.
This is good news for trend-following traders because
acceptance of the turning point by the majority takes a
familiar form. First we get the News Shock, in this case the
good news in early December that payrolls fell only 11,000
in November, about one-tenth the forecast. Then we get
FIGURE 1 — DOLLAR TURNAROUND
The dollar index broke the top of its channel and eclipsed the previous month’s high,
recapturing around 24 percent of what it lost in the sell-off from the March 2009 top.
comments from top analysts — this time it was BNP Paribas
and Merrill Lynch declaring the dollar’s days in the wilder-
ness were ending.
After that, it’s confirmation from the Commitments of
Traders (COT) report, which for the week of Dec. 15 showed
the majority of speculators had shifted from short dollars to
long dollars: a net Euro short of 16,448 contracts, a sharp
turnabout from the net Euro long of 51,045 contracts from
Oct. 6, itself the largest long since Jan. 8, 2008.
Figure 1 shows the U.S. dollar index (DXY) broke the top
of its channel the very day of the News Shock and never
looked back. It easily pushed above the previous high from
a month earlier. In just two weeks, DXY retraced 24 percent
of the down move from the March 2009 peak.
What we should expect next
is some zigzagging, as the early
birds take profit and former
holdouts and newcomers use
temporary dips to jump on the
bandwagon. At a guess, the dol-
lar index could easily reach the
congestion zone near the 38-per-
cent retracement level (circle) by
the end of February (dotted
line), or perhaps the 50-percent
retracement level.

Contributing factors
Markets never move in straight
lines, of course, so it’s helpful to
identify potential stumbling
blocks. First, the interest-rate
turning point is not the only
thing happening in the world of
finance. The dollar got a tradi-
tional safe-haven boost from the
Dubai World debacle — one of
the most badly handled busi-
Source: Chart — Metastock; data — Reuters and eSignal
ness failures of all time. It’s a

12 January 2010 • CURRENCY TRADER

government-owned company whose govern- FIGURE 2 — SOFT OIL
ment claimed it had never offered a sovereign The consensus seems to be oil could remain in the $70 to $80 range
guarantee, but then got a large measure of sup- because of weak U.S. and European demand.
port from a neighboring sovereign. This puts
the world of sovereign risk on a new footing
altogether.

We are about to see if the

Fed can manage inflation
without raising everyone’s
interest rates to Volckerian
levels.
Also new to the world of finance is two out of
three ratings agencies downgrading the sover-
eign paper of Greece below the collateral-grade
level accepted by the European Central Bank
(ECB). One important European official, former Source: Chart — Metastock; data — Reuters and eSignal
Finance Minister of Germany
Peer Steinbrueck, said it was FIGURE 3 — THE BOND FACTOR
unthinkable the European The dollar also got support from rising bond yields, which are higher mostly in response
Union (EU) would abandon to improved growth estimates for the U.S. economy.
Greece. However, a current
ECB member, Austrian
Central Bank Governor Ewald
Nowotny, said the EU and the
ECB would not intervene, and
besides, Greece doesn’t need
intervention.
Really? The Greek budget-
deficit/GDP ratio is quadru-
ple the rate allowed by the
Stability Pact, 12.7 percent vs.
3 percent. Athens has yet to
voice a credible plan for recti-
fying its fiscal situation,
whereas other struggling
Economic and Monetary
Union (EMU) peripherals
such as Ireland and Spain are
making Herculean efforts to
do so.
There is something brewing
Source: Chart — Metastock; data — Reuters and eSignal
continued on p. 14

CURRENCY TRADER • January 2010 13

 ON THE MONEY

FIGURE 4 — THE END OF THE DOLLAR CARRY TRADE

in the Austrian banking sec-
tor, too. One bank was nation- If rising U.S. interest rates push carry trades away from the buck as a funding currency,
the dollar could recover much of the ground it lost vs. the yen since June 2007.
alized unexpectedly, and reg-
ulatory authorities are report-
edly watching at least one
other big bank like a hawk.
Nobody thinks there has
been full disclosure of all the
bad loans made by European
banks; suspicions linger that
losses arising from Eastern
Europe and the Baltic states
have yet to be revealed. This
is not the same thing as the
repudiation of sovereign
responsibility in the Dubai
situation, but its very murki-
ness arouses fear among
international investors
because they can’t be sure
what is safe — let alone guar-
anteed, and by whom.
Nobody thinks Greece
would leave the EMU or if it
did, the EMU as a whole Source: Chart — Metastock; data — Reuters and eSignal
would in some way “fail.”
Still, the dollar has been and will probably remain a benefi- (Figure 3). This is a difficult subject at year-end, with most
ciary of uncertainty in these matters. Certainly resolution of fixed-income traders saying they are done for the year, but
the Dubai World debt-payment suspension and the Greek still lightening up their holdings to a heavier cash weight.
situation would remove a cause of dollar demand; even Yields are higher all along the curve, which is steepening as
postponement of the Greek problem relieves pressure on well, mostly in response to higher growth estimates for the
the Euro. No one believes Greece will have complied with U.S. economy — even if higher growth doesn’t necessarily
EMU treaty obligations by the new deadline, 2013, but include rosy estimates for the employment numbers that
promises are deferring the moment of truth. The focus of started the whole thing.
worry is now transferred from corporate credit and mort-
gage credit to sovereign credit, and from the U.S. to Europe
and the Middle East.
Crude oil was soft during the same period — in fact, it
When hopes are so high, a loss
had been falling for about four weeks before the interest-
rate cycle turning point (Figure 2). You might say it set the
of confidence could be deeply
stage, allowing the performance to go on. We are all accus-
tomed to the dollar and oil moving inversely to one anoth-
dollar negative.
er and the ridiculous circular reasoning that goes along
with it. Still, the latest consensus on oil is that it will remain Nobody follows the interest-rate cycle more closely than
around $70 to $80 because of anemic demand in the U.S. the bond crowd. They are weathering the end of the gov-
and Europe, even if demand from emerging markets in gen- ernment’s “extraordinary measures,” including the Fed’s
eral (and China in particular) remains robust. What hap- purchase of Treasuries, the commercial paper and other
pened to the forecasts of oil reaching $150? Forgotten for the credit programs (which ended Dec. 31), and the biggie, the
moment. This is remarkable, since the first talk of “green purchase of mortgage-backed securities slated to end
shoots” earlier this year triggered a big rise in oil. March 31.
Also, the dollar got support from rising bond yields continued on p. 16

14 January 2010 • CURRENCY TRADER

 ON THE MONEY

FIGURE 5 — DOWNTRENDING YEN, UPTRENDING NIKKEI

There is a strong inverse correlation between the yen and the Japanese stock market. ended its corporate bond-buy-
ing program and it has no
anti-deflationary initiatives on
the table, except the same old
government-spending pro-
grams.

The dollar’s position

Source: Chart — Metastock; data — Reuters and eSignal
Moreover, the bond gang is accepting with good grace
the idea the Fed can raise rates without lifting the Fed funds
rate itself. (It can do that by changing the amount of inter-
est it pays banks on reserves, for example.) We could see a
divergence between the Fed managing bank credit activity
and the Fed managing the money supply. This has never
been done before in the U.S. economy. Changing the earn-
ings on funds (instead of just the cost of funds, as with the
Fed funds rate) is a second tool for the Fed, which has too
few. Yes, the Fed created $1 trillion in new money supply,
but nearly all of that went to bank excess reserves rather
than leaking out, with inflationary perniciousness, into the
economy. In short, we are about to see if the Fed can use
new tools to manage inflation without raising everyone’s
interest rates to Volckerian levels. Tiered interest rates with-
out capital controls — what an idea.
In the space of a month, we have gone from wondering
when major central banks would start disclosing their exit
strategies, to having the whole process planned out — in
the U.S.
Meanwhile, the ECB ended its 12-month special repo
funding, but the European Commission is still reluctantly
disclosing bank losses and fretting over new capital ade-
quacy requirements from the Bank for International
Settlements. In Japan, the government squeaks that it “will
not tolerate” a return of deflation, but the Bank of Japan
The U.S. is clearly the global
leader economically and insti-
tutionally. The dollar benefits
when the U.S. takes decisive
action, even if (perversely) it’s
inherently negative action,
such as the Iraq wars. For the
Fed to announce that extraor-
dinary programs will expire
on schedule may not seem like
“decisive action,” but the mar-
ket will interpret it that way,
probably because the rest of
the official financial world is
so muddled and inconsistent.
So what can go wrong? High on the list has to be some-
thing new from China, which has taken the sullen stance
that it hates having to buy U.S. Treasuries with its excess
reserves but has no choice. When the dollar was falling,
derogatory comments from Chinese officials always had an
additionally negative effect. There’s no reason to suppose
China will be quiet in 2010.
Another possibility is a geopolitical surprise from any of
the big trouble spots such as Iran and Pakistan. There could
be a resurgence of terrorism, or a natural disaster; there
could be some kind of fiscal disaster from California or
New York, two famously dysfunctional state governments.
The U.S. government could decide to break up Citigroup.
After all, we have not actually solved the moral hazard
issue — banks that are too big to fail. In fact, we have got-
ten bigger banks, if fewer of them. The number of potential
shocks never really goes down.
The most likely negative is not a shock per se — it’s ris-
ing unemployment in the U.S. that persists many months
into the new year, sapping confidence in the recovery. This
is where the cruel realities of American-style capitalism
come home to roost, and not only in the humanitarian
arena. It has often been observed that businesses tend to
shy away from capital spending — the engine of growth —
as long as unemployment remains high. This is a kind of

16 January 2010 • CURRENCY TRADER


negative feedback cycle, and it is also
deflationary.
If the new model for the forex market
is “growth leads,” the U.S. has to keep
delivering growth, and there are some
economists who foresee a dip in eco-
nomic activity in 2010. A loss of confi-
dence could be deeply dollar-negative
when hopes are so high.
One thing to feel confident about is
with U.S. rates purportedly about to
rise, the dollar will stop being a funding
currency for carry trades, leaving the
Japanese yen on that hook again. It’s
uncertain whether the shift will be grad-
ual or abrupt, but it seems logical the
dollar will recover at least half, if not all
the ground it lost since the crisis began
in June 2007. At that time the dollar/yen
(USD/JPY) peaked at 124 and then fell
as low as 86.40 by the end of November
(Figure 4). A 50-percent retracement
would take the dollar back to around
105.
The inverse correlation of the yen and
the Nikkei 225 stock index is the
strongest of all the cross-security corre-
lations, and the longest lasting. A down-
trending yen implies an ever-rising
Nikkei. Figure 5 shows the USD/JPY,
Nikkei 225, and the iShares MSCI Japan
Index fund (EWJ), which tracks the
MSCI Japan.
The new dollar rally could fall apart
at the seams at any moment. It has bare-
ly begun, it’s fragile, and we’re not
accustomed to it. The market is full of
diehard deficit haters who think the U.S.
deficits are fatal to the dollar in the long-
term. They will always have an anti-dol-
lar bias.
But the new rally is based on the
biggest factor in the forex pantheon — a
turning point in the interest-rate cycle.
Fortunes will be made, and all from one
bee.
For information on the author see p. 6.
CURRENCY TRADER • January 2010
Related reading:
Other Barbara Rockefeller articles
“The easy fix”
Currency Trader, December 2009.
The dollar has for some time been supported primarily by lip service from gov-
ernment officials. What could really make a difference in the buck’s prospects?
“Bucks, bonds and the new bully in town”
Currency Trader, November 2009.
The massive U.S. debt has many fearing the worst for the U.S. dollar. Perhaps
the sentiment is overdone.
“It’s the price of oil, stupid”
Currency Trader, October 2009.
A major drop in crude prices could help boost the dollar.
Will it happen?
“Are fundamentals coming back?”
Currency Trader, September 2009.
Assessing the signs of change in the FX market.
“The dollar still has a chance”
Currency Trader, August 2009.
The stabilizing economic picture doesn’t seem to have
benefited the buck very much.
“Bubble contamination”
Currency Trader, July 2009.
Pondering the nature of the currency-commodity
relationship.
“Risk aversion”
Currency Trader, June 2009.
Extraordinary times call for out-of-the-box thinking about markets.
“Forecasting follies”
Currency Trader, May 2009.
The only technicals that provide tradable forecasts are
patterns — but you have to be on the correct time frame
and you can’t forget about the fundamentals.
“Listening to the chart”
Currency Trader, April 2009.
While everyone debates the ramifications of various policy measures, what is
the Euro/dollar chart saying?
“Rational fear and the forex market”
Currency Trader, March 2009.
Analysis of several intermarket relationships suggests the role of risk aversion
in the forex market is no cut-and-dried issue.
“Competitive devaluations, the EMU, and the yen”
Currency Trader, February 2009.
Currency devaluation never works in the long run — just ask Japan — but that
doesn’t mean panicky governments won’t use it to try to stem the flow of blood
in the near term.
“The Euro: Prosperity or perdition?”
Currency Trader, January 2009.
The belief the Euro sell-off has ended may be based on some false assump-
tions about how the U.S. and Europe are handling he economic crisis.
17
 TRADING STRATEGIES
The Turtle system:
Forex performance analysis
The Turtle rules were much more than breakout signals. These tests on a currency portfolio
incorporate the volatility-adjusted position-sizing rules that were integral to the approach.
BY DANIEL FERNANDEZ
O ne of the most popular trading strategies of the
past 30 years is the “Turtle” trading system
Richard Dennis and his partner Bill Eckhardt
designed to discover whether virtually anyone could be
trained to trade profitably by following a set of systematic
rules that determined position sizing as well as trade entry
and exit points (see “Turtle tales”). It has been the subject of
much debate and a great deal of misinterpretation and mis-
information over the years.
The system, which was developed in the 1980s and
intended to be traded across a broad portfolio of futures
(which originally included the Swiss franc, French franc,
Deutsche mark, British pound, Canadian dollar, and
Japanese yen contracts), was designed to capture interme-
diate and longer-term trends.
FIGURE 1 — TURTLE TRADE
The longer-term Turtle system tested here enters on a 55-day breakout and
exits on a 20-day breakout.
Source: MetaTrader
18
How well it does in today’s spot forex market is the sub-
ject of the following analysis. We’ll test the original Turtle
rules on seven currency pairs over nine years of recent price
data and see how the system holds up.
The basic Turtle rules
A detailed description of the Turtle trading system
appeared in a 37-page document titled “The Original Turtle
Trading Rules” (OriginalTurtles.org, 2003) published free of
charge on the Internet by former Turtle Curtis Faith in
response to what he saw as the unethical sale of the Turtle
trading methods by another former Turtle and also “on a
Web site by a non-trader.” The system tested here is System
2 from that document. He also discussed these rules in his
book The Way of the Turtle (McGraw-Hill, 2007; see “Related
reading”). The Turtle system is a
breakout trend-following method, and
there were shorter-term and longer-
term versions of the system.
In this case, we’ll experiment with
the longer-term version, which enters
in the direction of a 55-day high/low
breakout (i.e., above the highest close
of the past 55 days or below the lowest
continued on p. 20
TABLE 1 — SPREAD CHARGES
Trading costs are reflected in the
different per-trade spreads charged
to each currency pair.
Pair Spread
EUR/USD 2
GBP/USD 3
USD/JPY 3
NZD/USD 5
AUD/USD 5
USD/CHF 3
EUR/JPY 4
January 2010 • CURRENCY TRADER
Retracement or reversal?
It’s a typical scenario: You’re holding a position in the
market, and a sudden move in the wrong direction makes
you wonder if the move is a retracement or a reversal. A
retracement is a temporary pullback, when price bounces
off support and resumes the direction of the original trend.
A reversal occurs when price breaks through the support
level and continues to move against the original trend.
When you’re confronted with these moves,
you may wonder:
1. Should I surrender and take the loss?
2. If not, how much money am I willing to risk?
3. Should I set a stop-loss based on a percentage or
dollar amount? How do I choose the “right”
amount?
4. If I take the loss and the market resumes the trend I
anticipated, should I reenter?
5. Should I stick with my original strategy even when
I experience a deep drawdown?
6. Is there a way to identify support levels when
entering the market?
This last question is the most important: If you knew the
market support levels, you could use them to test market
strength. When a market fails to penetrate a support level
and resumes the anticipated trend, that movement is likely
a retracement. You could add to your position when a
retracement occurs. On the other hand, if the market pene-
trates the support level and closes beyond it, the move-
The market is always changing, but T2 stops remain unchanged. Once you see them work time and time again,
you will learn to rely on T2 stops. AbleTrend T2 stops can help you thrive in today’s volatile markets.
ment is likely a reversal. When this happens, you might
want to exit the position and cut your losses short.
Identifying an objective support level is the key to distin-
guishing retracements and reversals; is there a way to
determine these levels?
The answer is yes! AbleTrend 7.0 places blue dots (“T2
stops”) below the price bars, providing support levels at
your fingertips. AbleTrend 7.0 T2 stops offer the follow-
ing advantages:
1. T2 stops are 100% objective because they are
defined by the market’s own support levels.
2. The scientific calculations behind T2 stops are
universal — not curve-fitted.
3. T2 stops can be backtested to reveal the
characteristics of individual markets.
4 There are no delays because T2 stops are updated
with each new tick.
5. T2 stops are proprietary for the exclusive use of
software owners.
6. T2 stops can boost your confidence, because “you
have seen it happen hundreds of times” historically
and in real time. Confidence is critical for
successful trading.
7. Users can take advantage of “sweet spot entries” by
entering the market right after prices test a T2 stop
support level and resume the original trend. These
entry points are often close to T2 stops.
 TRADING STRATEGIES

Turtle tales close of the past 55 days) and exits on

a 20-day high/low breakout in the
opposite direction. The system
This excerpt from “Curtis Faith: Turtle tales” (Active Trader, June 2007) recounts
attempts to capture trends of medi-
the origins of the Turtles and some of the observations of one of the group’s
um- to long-term duration, with the
original members, Curtis Faith.
average profitable position lasting
more than two months. Figure 1
Richard Dennis and William Eckhardt had already made millions in the markets
shows a sample trade in the
when they got the idea for the Turtle experiment. The two disagreed about
EUR/USD pair.
whether great traders were the product of nature or nurture, with Eckhardt believ-
More important than the entry and
ing successful traders had inherent skills and Dennis arguing that anyone could
exit signals, the system has a series of
be taught to outperform in the markets.
rules dictating trade size and stop
The pair decided to launch a trading program to settle the debate. They would
placement. Positions are “normal-
teach a group of neophytes their system and then give real trading accounts to
ized” according to volatility so dollar
those who successfully completed the training. As legend has it, the group’s
risk is the same from trade to trade
moniker stemmed from Dennis’ visit to a turtle farm outside Singapore; he claimed
and market to market — an
he and Eckhardt would be able to “grow” traders like turtles.
approach, Faith noted, that enhances
the benefits of diversification. To see
AT: You wrote in your book (The Way of the Turtle, McGraw-Hill, 2007) the initial
detailed examples of the volatility-
training period was only two weeks, and then you were given a small account to
adjusted position-sizing rules, click
trade during a kind of probationary period. What was the trading process like?
here between Jan. 6 and Jan. 31.
CF: We put on our positions in chunks called “units.” Normally, the size of the unit
Also, the system pyramids trade
would depend on the volatility of the market, so in a low-volatility market, we might
entries, adding to positions when a
have a lot of contracts on, while in a high-volatility market, we’d have fewer con-
market moves in a trade’s favor. After
tracts on. For the probationary period, our unit size was three contracts in every
an initial entry signal, the system
market, just to make things simple. By comparison, later on we’d have unit sizes
adds up to three additional positions
of 20, 30, or 50 contracts, in some cases.
(referred to as “units”) if a market
The system’s entry and exit rules were things I’d seen before. The normaliza-
moves favorably by half the 20-day
tion of volatility across markets and the idea of adjusting the quantity you traded
average true range (ATR). For exam-
based on the volatility of particular markets was a new concept at that time.
ple, if a long trade is entered in a mar-
ket at a price of 100.00 and the 20-day
AT: You’re talking about adjusting the number of contracts so the dollar value of
ATR at the time is 5 points, another
the positions is kept constant in different markets, right?
long entry would be executed if price
CF: Right. So, assuming everything else was equal, our positions tended to go up
reaches 102.50.
and down about the same [dollar] amount every day. That was an innovative con-
The system’s stop-loss is two times
cept.
the 20-day ATR, adjusted to the most
I’d run many, many [system] tests before, but it was always a matter of consid-
recent trade when the market is mov-
ering the profits in, say, corn, soybeans, gold, and silver separately, whereas Rich
ing in the position’s favor. In the pre-
[Dennis] really looked at things from a total portfolio perspective. You get com-
vious trade example, the stop-loss
pletely different answers if you look at trading from a portfolio perspective; you
would have initially been placed at
come to different conclusions about whether you should be trading a particular
90.00. If the 20-day ATR at the time of
market.
the second trade entry (at 102.50) was
4.00, the stop for both open positions
AT: What kind of freedom were you given?
would become 102.50 - (2*4.00) =
CF: We could do whatever we wanted within the framework of what we’d been
94.50.
taught. With respect to markets, we were essentially told, “Pick your markets and
be consistent with them — don’t pick and choose trades.”
Historical testing
We could decide, say, we weren’t comfortable trading one of the thinner mar-
All tests were performed on daily
kets, such as coffee. In my case, I didn’t like the S&P 500 because I didn’t think it
data from June 1, 2000 to June 1, 2009
trended well for the type of short-term systems we were trading. So I never trad-
using Metatrader 4. The rules were
ed it. But we weren’t supposed to pick and choose trades, and that’s where peo-
applied to seven currency pairs:
ple got into trouble. They would decide a particular trade in a particular market was
Euro/U.S. dollar (EUR/USD), British
too risky — and that would be the one that would end up making 50 percent on
pound/U.S. dollar (GBP/USD), U.S.
the year.
dollar/Japanese yen (USD/JPY),
New Zealand dollar/U.S. dollar
— Currency Trader Staff
continued on p. 22

20 January 2010 • CURRENCY TRADER

ads 0210 12/11/09 32:54 PM Page 58
 TRADING STRATEGIES

Test results
TABLE 2 — INITIAL TEST RESULTS
Table 2 shows the tests results. The system
Although five of seven pairs had positive average annual returns, overall did not perform well on all currency pairs.
average was 11 percent — compared to an average maximum drawdown of Five of seven pairs had positive average
47 percent. annual returns (and three of those were
above 20 percent), but the average for the
Avg. Avg entire portfolio was 11 percent. Four of the
Currency yearly Max. No. Win profit/avg. pairs had mediocre to poor results, with
pair return drawdown trades % loss ratio some, including the NZD/USD and the
EUR/USD 27% 23% 147 47% 2.44 AUD/USD, producing very high draw-
GBP/USD 8% 34% 151 34% 2.73 downs (in excess of -60 percent). The aver-
USD/CHF -1% 40% 185 26% 2.58 age maximum drawdown was 47 percent.
USD/JPY 3% 33% 141 37% 2.02
Figures 2 and 3 reveal substantial differ-
ences in the equity curves for EUR/USD
NZD/USD 22% 66% 168 30% 3.63
and NZD/USD, respectively. The
AUD/USD 20% 64% 154 32% 3.47 EUR/USD pair made new equity highs at
EUR/JPY -1% 67% 157 37% 2.50 least every two years while the NZD/USD
Median: 8% 40% 154 34% 2.58 had an extremely profitable period
Average: 11% 47% 158 35% 2.49 between 2002 and 2005 followed by a draw-
down that lasted until mid-2008 — nearly
three years.
(NZD/USD), Australian dollar/U.S. dollar (AUD/USD), Like any trend-following system, the Turtle trading sys-
U.S. dollar/Swiss franc (USD/CHF), and Euro/Japanese tem generates highly profitable trades when the market
yen (EUR/JPY). Table 1 shows the spreads that were moves aggressively, such as when the economic crisis start-
assessed per trade for each pair in the testing process. ed to fuel strong rallies in 2008. During this period, the
The initial account equity was $100,000. The strategy was EUR/USD pair had a single trade that produced a profit of
also tested in paper trading on the EUR/USD from January nearly 70 percent of the initial account equity. Winning
2009 to June 2009; the results matched those of the test. trades are the exception to the rule — all the pairs had win-
ning percentages below
FIGURE 2 — EUR/USD EQUITY CURVE 50 percent, and all but
one were below 40 per-
The EUR/USD pair made a new equity high at least every two years. cent. However, the
average profit/average
loss ratio shows the
average winning trade
was two-and-half times
the size of the average
losing trade for portfo-
lio as a whole.
The Turtle system’s
drawdowns are mostly
the result of whipsaw
FIGURE 3 — NZD/USD EQUITY CURVE trades — i.e., false
The NZD/USD equity curve was much different from the EUR/USD’s: The pair’s extremely profitable breakouts, when a trade
2002-2005 period was followed by a nearly three-year drawdown. is triggered in one
direction but price
quickly reverses, stop-
ping out the trade (a
process that can repeat
many times in non-
trending market condi-
tions, resulting in a long
series of losing trades).
This was the case
between 2005 and 2008

22 January 2010 • CURRENCY TRADER

 FIGURE 4 — WHIPSAWS
Related reading Like any trend-following system, the Turtle approach is subject to repeated whip-
saw trades.
Daniel Fernandez articles:
“Adaptive FX money management”
Currency Trader, November 2009
Historical tests illustrate the impact of a
dynamic money-management regime on
strategy performance.

Other articles:
“Curtis Faith: Turtle tales”
Active Trader, June 2007
Nearly 20 years after the famous trading
experiment ended, a graduate of the origi-
nal “Turtle” class of 1983 talks about his
experiences (Active Trader interview).

“Modified turtle soup”

Active Trader, December 2009
A Trading System Lab analysis of an
inversion of the shorter-term Turtle signals.

in AUD/USD and NZD/USD. Figure 4

shows examples of these losing trades in
the NZD/USD. Source: MetaTrader

Making adjustments TABLE 3 — USING A QUICKER EXIT

The test results indicated it might be possi- Shortening the exit breakout threshold to 10 days improved the strategy’s
ble to increase the system’s profitability by reward-risk characteristics.
simply shortening the exit breakout thresh-
old, which would liquidate trades more Avg. Avg
quickly and give back less when a retrace- Currency yearly Max. No. Win profit/avg.
ment occurs. Rather than optimize values pair return drawdown trades % loss ratio
for each currency pair, Table 3 shows the EUR/USD 43% 17% 165 50% 2.60
results using a 10-day exit rule across the GBP/USD 11% 35% 173 39% 2.37
board. USD/CHF 3% 31% 191 33% 2.44
This change reduced the average maxi-
USD/JPY 13% 31% 149 44% 2.18
mum drawdown by 9 percent while
increasing the average and median yearly NZD/USD 6% 58% 196 38% 1.94
profits by 3 percent. Aside from this overall AUD/USD 15% 39% 188 44% 2.05
improvement in the strategy’s reward-risk EUR/JPY 6% 57% 168 33% 2.52
profile, closing positions faster also Median: 11% 35% 173 39% 2.37
increased the average winning rate by 4 Average: 14% 38% 176 40% 2.30
percent; fewer trades reached the stop-loss
point. The average profit/average loss
ratio was minimally impacted, with the median declining Trading the Turtle system
from 2.58 to 2.37. However, this change also resulted in a Because the big trend moves the Turtle system relies on
higher number of trades. These additional entry opportuni- don’t happen frequently, traders must be prepared to
ties often occurred in the middle of long-term trends, and weather extended drawdown periods — up to two years —
are one of the main reasons for the increase in profitability. before being rewarded with substantial profits.
It’s worth noting that all the currency pairs became net The original Turtle system didn’t perform terribly in this
profitable with the reduction of the exit period. The currency portfolio, but making a simple, unoptimized
EUR/USD, USD/JPY, and EUR/JPY pairs benefited the adjustment of cutting the exit threshold in half improved
most from this modification, while AUD/USD and results notably, shrinking the drawdown and boosting prof-
NZD/USD suffered the most adverse in terms of profitabil- its. Further modifications may reveal additional insights.
ity. However, these pairs also saw their maximum draw-
downs shrink 25 and 8 percent, respectively. For information on the author see p. 6.

CURRENCY TRADER • January 2010 23

 ADVANCED STRATEGIES

Currency carry
and yield-curve trading
Carry traders of all stripes: A bull market in a country’s bonds is often accompanied
by a weakening in the carry return into that currency, and other facts you should know.

FIGURE 1 — STEEP U.S. SWAP CURVE LED

TO U.S. EQUITY UNDERPERFORMANCE BY HOWARD L. SIMONS
The swap carry for the U.S. shows a small top during the Federal Reserve’s first
declaration of war on deflation in May 2003, marked with a green vertical line.

T
wo traders walk into a
bar. One says, “I bor-
row at the short end of
the yield curve and
lend at the long end of the yield
curve when it is positively sloped. I
focus on the spread between two-
year and 10-year instruments. I
guess you could say I‘m a carry trad-
er.” The other says, “I borrow at the
short end of the yield curve in one
currency and lend three months later
in another currency when the rate at
which I borrow is less than the rate
at which I lend. I guess you could
say I’m a carry trader, too.”
The punch line is both traders are
doing pretty much the same thing.
FIGURE 2 — AUSTRALIAN TWO-TEN CARRY LINKED TO CURRENCY The key difference, of course, is the
AFTER MAY 6, 2003 term trader is taking on a great deal
The flood of money coming out of the U.S. spurred demand for Australia’s resource of yield-curve risk over a longer
exports and led to a return flow of capital into Australia, where influx pushed swap period of time while the currency
yields lower and lowered the swap return differential. trader is taking on very hedgeable
spot-market risk over a short period
of time. But beyond that similarity,
the two traders live on opposite ends
of the trading universe and almost
certainly trade on different desks
and share virtually no information.
Logic says the two carry trades
should be related in some form to
each other. After all, if a country
drives its interest rates down toward
zero, as Japan, Switzerland, and the
U.S. have done in turn, they open up
carry trades (see “Looking at the
carry trade,” June 2007, “The short,
awful life of the dollar carry trade,”
August 2008, and “Franc-ly my dear,
I don’t give a carry,” September

24 January 2010 • CURRENCY TRADER

 FIGURE 3 — BRITISH POUND TWO-TEN CARRY LINKED TO CURRENCY
AFTER MAY 6, 2003
A massive lowering of British short-term interest rates culminating with a move to
quantitative easing in March 2009 led to both a lower currency carry and a bull
2008). Moreover, carry trades are the market in British bonds.
one class of long-term currency trades
capable of producing significant
excess returns (see “Currency traders
should be humbler,” May 2007). That
same stimulus at the short end of the
yield curve should have some, impact
on longer maturities. (But not neces-
sarily proportionate impact.)
As is always the case in such mat-
ters, we should expect to learn more
from what we cannot explain directly
— the residuals of the process and the
various anomalies of the market rela-
tionship. Two variables will be exam-
ined for nine currencies: first, the
return on the carry trade of borrowing
the U.S. dollar (USD) and lending in
each currency; second, the return on
the trade of financing a 10-year fixed- FIGURE 4 — NEW ZEALAND DOLLAR TWO-TEN CARRY LINKED
rate receiving position on a swap in TO CURRENCY AFTER MAY 6, 2003
the non-USD currency with a two-year The New Zealand economy is tied to short-term external financing — a dangerous
fixed-rate paying position on a swap position.
in the non-USD currency.
The return on the swap trade will be
presented on an inverse scale; as you
move toward the more positive num-
bers on the bottom, the return on the
10-year fixed-rate receiving position
has increased; this is similar to saying
there has been a bull market in bonds.
The currency carry trade is present-
ed on a normal scale. Here, as the
numbers become more positive, the
return on financing short-term
deposits in another currency with USD
borrowings has increased. We should
expect the two curves to move in sim-
ilar directions: A bull market in bonds
often occurs in the context of lower
short-term interest rates and hence
lower returns on the currency carry three-decade-long bull market in human history. If we look
trade. at the swap carry for the U.S., we see a small top during the
Finally, the scales are displayed as incremental returns to Federal Reserve’s first declaration of war on deflation in
the base indexing date of the Jan. 4, 1999 advent of the Euro. May 2003, marked with a green vertical line (Figure 1). The
bull market resumed and hit what may turn out to be a gen-
The U.S. base erational top in December 2008.
Before moving into the series of charts for the non-USD cur- Note what happened to the performance of the U.S. stock
rencies, let’s take a look at the U.S. market with a different market vis-à-vis the MSCI World Free index in local curren-
dimension. The U.S. has been in a secular bond bull market cy terms after May 2003. The U.S. underperformed the rest
since 1981. This ranks as perhaps the most-disbelieved continued on p. 26

CURRENCY TRADER • January 2010 25

 ADVANCED STRATEGIES

FIGURE 5 — CANADIAN TWO-TEN CARRY LINKED

AFTER SEPTEMBER 2005
Country cases
Unlike other currencies, the key month for the CAD was September 2005, not May 2003.
The country with the greatest con-
formance to the hypothesis that
swap carry and currency carry are
linked is, rather surprisingly,
Australia after May 2003 (Figure 2).
The flood of money coming out of
the U.S. spurred demand for
Australia’s resource exports (see
“What’s down with the Australian
dollar?” March 2008) and led to a
return flow of capital into
Australia. That capital influx
pushed swap yields lower and low-
ered the swap return differential.
The one prominent exception
during the post-May 2003 period
occurred during the financial crisis’
peak in 2008-2009; the plunge in
Australian bond yields coincided
FIGURE 6 — SWEDISH KRONA TWO-TEN CARRY LINKED WEAKLY with a flight out of the Aussie dol-
TO CURRENCY AFTER MAY 6, 2003 lar (AUD) as resource exports and
The SEK’s carry to the USD was far less active after May 2003 than was the return prices fell. Australia raised short-
on the swap trade. term interest rates in October 2009,
and this served to arrest some of
the one-way nature of the AUD’s
carry trade.
Next in line comes the British
pound, and there is an interesting
twist. The two countries most
affected by the financial crisis were
the U.S. and the UK, and the UK
very well may have gotten the
worst of it. The two financial sys-
tems were linked closely during the
post-May 2003 credit bubble and
then stayed linked during the very
depths of the financial crisis (Figure
3). A massive lowering of British
short-term interest rates culminat-
ing with a move to quantitative eas-
ing in March 2009 led to both a
of the world significantly after this date and after the lower currency carry and a bull market in British bonds.
Federal Reserve’s second declaration of war on deflation in The New Zealand dollar (NZD) is next on the list — and
December 2008. And yet the Federal Reserve continues and yes, there does seem to be an English-speaking theme here
is likely to continue targeting the U.S. stock market with — even though the carry most affecting the kiwi has been
low interest rates for a long time to come despite this rather that based on the Japanese yen (see “Getting carried away
demonstrable failure. That policy will affect both the cur- with the kiwi,” July 2008). The small New Zealand econo-
rency carry indices seen here and the swap market differ- my is tied to short-term external financing, and that is
entials. always a dangerous spot (Figure 4). Let’s hope they fare
better than Iceland in this regard.

26 January 2010 • CURRENCY TRADER

 FIGURE 7 — NORWEGIAN KRONE TWO-TEN CARRY NOT LINKED
TO CURRENCY AFTER MAY 6, 2003
The NOK carry to the USD has been unimportant and has scarcely moved in the
same direction as the return on the swap trade.
We can end the list of English speak-
ers with bilingual (just ask them and
they will tell you) Canada. Unlike
other currencies where the May 2003
date is significant, the key date for the
Canadian dollar (CAD) was September
2005 (Figure 5). It’s quite hard to point
to a single development which may
account for this belated linkage, but
once it occurred, it remained quite
strong going into the depths of the
financial crisis in 2008-2009.
Two Nordic currencies, the Swedish
krona (SEK) and the Norwegian krone
(NOK), are on the list, and the two
behave differently as is their wont (see
“Nordic currency confusion,”
November 2008). The SEK’s carry to
the USD was far less active after May 2003 than was the the currency exchange rate is carrying externally. Of course,
return on the swap trade (Figure 6). This is an odd case the primary currency trade for the SEK is not its carry to the
where mid- and long-term interest rates seem to be carrying dollar but its spot rate vs. the Euro.
more of the adjustment burden within an economy than continued on p. 28
 ADVANCED STRATEGIES

FIGURE 8 — EURO TWO-TEN CARRY NOT LINKED TO CURRENCY

AFTER MAY 6, 2003
link between their carry to the dollar
The Euro has had a positive carry to the dollar for years and has been in a bull and the swap trade returns. The Euro
market for bonds since May 2003, but the two moves are operating without any
has had a positive carry to the dollar
apparent connection to one another.
for years and has been in a bull market
for bonds since May 2003, but the two
moves are operating without any
apparent connection to one another
(Figure 8).
How can we account for this? The
European Central Bank has a single
mandate — price stability — while the
Federal Reserve has the infamous dual
mandate of both price stability and full
employment. The Federal Reserve
clearly has leaned to full employment
since the late 1990s as evidenced by its
role in the serial inflation of financial
bubbles. These conflicting mandates
have created swap markets out-of-
phase with one another and with the
currency carry trade. As an aside, this
out-of-phase character is consistent
FIGURE 9 — SWISS TWO-TEN CARRY LINKED TO CURRENCY
AFTER MAY 6, 2003
with the idea global currency markets
orbit around the central exchange rate
The CHF’s carry against the dollar has been minimal for nearly five years while it
remains in its own bond bull market. The link between the two trades is weak of the USD-EUR trade (see “The dollar
because the carry trade largely has been a non-factor. index and ‘firm’ exchange rates,”
December 2005).
Switzerland is one of the few coun-
tries whose short-term interest rates
have competed with the dollar for the
basement in recent years. As a result,
the Swiss franc’s (CHF) carry against
the dollar has been minimal for nearly
five years while it remains in its own
bull market for bonds (Figure 9). The
link between the two trades is weak
because the carry trade largely has
been a non-factor.
Finally, we come to the champion of
low interest rates, Japan. Here the long-
term carry against the dollar has been a
money loser, but the long-term bull
market for bonds and the return on the
swap trade have been linked erratically
The case of the Norwegian krone is far simpler: The NOK to the money-losing carry trade as both the U.S. and Japan
carry to the USD has been unimportant and scarcely moved have raced to zero in a leapfrog fashion (Figure 10).
in the same direction as the return on the swap trade
(Figure 7). Norway became the first European country to The second front
raise short-term interest rates in October 2009; this has had The critical takeaway is, as predicted, what was not dis-
no discernible effect on the carry trades. played directly. While not all swap trades are joined at the
The last group of currencies has almost no discernible hip to the currency carry trade, none move counter to it.

28 January 2010 • CURRENCY TRADER

 FIGURE 10 — JAPANESE YEN TWO-TEN CARRY ERRATICALLY
This means our two trader friends LINKED TO CURRENCY AFTER MAY 6, 2003
who walk into the bar should strike Although the long-term carry against the dollar has been a money loser, the
up more than a passing acquain- long-term bull market for bonds and the return on the swap trade have been linked
tance; a successful carry trade into a erratically to the money-losing carry trade as both the U.S. and Japan have raced to
zero in a leapfrog fashion.
currency generally reflects higher
short-term interest rates in that cur-
rency, and therefore likely invites a
bearish position in that country’s
bond market as well. The opposite
holds true, too: A bull market in a
country’s bonds often is accompa-
nied by a weakening in the carry
return into that currency.
Both of our trader friends could
help themselves by keeping an eye
on each other’s markets. Not as a
short-term trading indicator; that
won’t work. The gain will come
from understanding the dynamics
behind their own market.

For information on the author see p. 6.

Related reading: Other Howard Simons articles

“A parody of purchasing power” “A cross rate to bear,” Currency Trader, May 2009.
Currency Trader, December 2009. The Euro/yen pair isn’t just a currency cross rate — it’s a
Is there such as thing as a currency “fair value”? gauge of global risk.
“The hidden cost of illiquidity” “And it’s one, two, three — what are we trading for?”
Currency Trader, November 2009. Currency Trader, April 2009.
Evidence mounts that we actually failed to learn the lessons They don’t call them frontier markets for nothing. A look at
of the Great Depression. Vietnam’s currency and stock market over the past few years.
“How Eastern Europe got carried away” “Sovereign credit risk and currencies”
Currency Trader, October 2009. Currency Trader, March 2009.
The Swiss National Bank’s move to quantitative easing in Government actions are perversely rewarding the guilty: As a
March reopened the Swiss franc-Eastern Europe carry trade. nation’s credit rating deteriorates, its borrowing costs fall and
its currency, at least temporarily, rises.
“Hungary’s Blue Danube Waltz”
Currency Trader, September 2009. “Minor trends make minor friends”
A look at a unique currency slated to be absorbed by Currency Trader, February 2009.
the Euro in the next few years. Do minor currencies offer trading opportunities the majors
don’t? Find out what the numbers say.
“Post-bubble ruble trouble and reversal”
Currency Trader, August 2009. “Let the trend be your friend: The majors”
Which rate matters most, the Russian ruble vs. the dollar, Currency Trader, January 2009.
or the ruble vs. the Euro? If currencies trend so much, why do trend followers usually
have such blah performance? This and other questions are
“Won flew over the carry’s nest,” Currency Trader, July 2009.
answered in this study of currency trends.
For better or worse, Korea’s currency seems to function as a
basic risk barometer. “Howard Simons: Advanced Currency Concepts, Vol. 1”
A discounted collection that includes many of the articles
“Currency volatility and long-term treasury returns”
listed here.
Currency Trader, June 2009.
The belief that higher currency volatility leads to steeper yield
curves and negative bond returns has been challenged by the
2008-2009 financial upheaval.

CURRENCY TRADER • January 2010 29

 CURRENCY TRADER INTERVIEW
Thomas Stridsman
puts research to work
Practicing money management, mathematical expectancy,
and patience in the forex market.
BY CURRENCY TRADER STAFF
W
ith decades of experience as a trading sys-
tem designer and financial writer, Thomas
Stridsman’s market career has entered a
new phase. The author of two books on
system design, Trading Systems That Work (McGraw-Hill,
2000) and Trading Systems and Money Management
(McGraw-Hill, 2003), Stridsman has also written extensive-
ly on these topics for Active Trader (as well as Currency
Trader), where he worked as both a senior staff editor and
contributing editor before taking his trading ideas to a dif-
ferent venue.
His systematic approach is currently at work in the mar-
kets courtesy of his commodity trading advisory (CTA),
Stridsman Managed Accounts, through which he trades
primarily currencies. Together with the Swedish manage-
ment company AlfaKraft, he also is in the process of
launching a series of futures-based hedge-fund and man-
Building a trend-following system is
easy; being competitive long-term
demands deep, rigorous research in
complex money management.
30
aged-account programs for diversified commodities,
energy products, and currencies.
A native of Sweden and currently living outside
Stockholm, Stridsman has named many of his trading pro-
grams after streets and neighborhoods in Chicago, where
he lived for a decade (his currency program is named
Lakeview, after the north side neighborhood). We spoke
with Stridsman toward the end of 2009 about his trading
career.
CT: What currencies are you trading?
TS: I stick to the majors vs. the U.S. dollar (Euro, Japanese
yen, British pound, Swiss franc, Australian dollar, Canadian dol-
lar, and New Zealand dollar), and, since I’m located in
Sweden, the Swedish krona, which I trade partially as a
hedge against depreciation on my trading account, which is
in U.S. dollars.
CT: How do your trading approaches or systems reflect
your philosophy about markets and how they work?
TS: I am, and have always been, a technical trend follower.
Even though I have a degree in macro economics, I don’t
care why the markets do what they do — I don’t care about
any fundamentals, and I don’t forecast in any way.
I read daily briefs from a couple of forecasting analysts —
one a fundamentalist, the other is into Elliot Wave and
Fibonacci. I think it’s both funny and pathetic how they
alter their opinions almost on a daily basis, mixing time
frames and reasons, sometimes even without regard to
what they wrote yesterday.
January 2010 • CURRENCY TRADER
 I read them, anyway, so I can keep up my end of a mar-
ket discussion, as I have noticed people almost get offended
if they ask me about the markets and I give them the true
answer, which would be, “I have no clue.” So in short, my
philosophy is to just follow the damn trends.
Trading one sector only, you have nothing working for
you when all the [markets] in the sector suddenly correlate
against you, so I had to add a correlation filter to my other-
wise very standard breakout system.
continued on p. 32

CT: What kind of trading approach-

es are you using?
TS: First of all, I am 100-percent
systematic and I only work with
daily data and breakout-type pat-
terns based on 15- to 25-day look-
back periods. The few times in my
life I’ve tried to deviate from the
systematic approach, I have failed. I
have a 100-percent track record in
that regard.
Sure, being a systematic trend fol-
lower also induces some pain from
time to time, but overall results
move slowly in the right direction.
Trend followers need to learn to sit
on their hands from time to time,
and other times endure the pain
from what seems like a never-end-
ing string of whipsaw trades. That
just comes with the style.

CT: Is the system you’re trading

designed specifically for currencies,
or is it the same system, or type of
system, you’ve designed for other
markets?
TS: I’ve been trading currencies for
about two years now. When I
worked as a researcher and writer
prior to trading currencies, I mostly
constructed systems for multi-sec-
tor portfolios. What surprised me,
and what I had to learn the hard
way, was how vulnerable you are to
correlations when you trade only
one sector. I took a huge hit early on
— in the spring of 2008 — because
of this, but I adapted well when I
recognized the root problem.
The systems I’m using for my
currency trading are adaptations of
multi-sector systems, mostly
because of the correlation issue. I
recently started to trade a larger
commodity portfolio as well, with
systems very similar to my currency
systems.

CURRENCY TRADER • January 2010 31

 CURRENCY TRADER INTERVIEW
CT: Are you trading more than one system? Are your sys-
tems always in the market?
TS: I’m trading two systems, and both are capable of stay-
ing out of the market completely from time to time. In fact,
that’s exactly what’s going on with one of the systems right
32
now (late December). It has no trades in any market at the
moment. This is because of the correlation issues I just men-
tioned.
CT: What about money management? What’s your
approach, and what role does that
contribute to your performance rel-
ative to the entry and exit signals
themselves?
TS: Those who have read my
books know that I believe money
management is much more impor-
tant than the systems themselves,
as long as the systems have a posi-
tive mathematical expectancy. The
money management algorithm
should do the income-generating
work. The signal-generating sys-
tems should just feed that algo-
rithm with a flow of money, in and
out, to work on.
That’s the way it should be. In
reality, I, too am trapped by real-life
constraints, with an account too
small to make the most of what I
just mentioned. So, in my current
situation, the systems are more
important, relatively speaking, than
I would like them to be. With an
account three to five times larger
than my current funds, I would be
able to start correcting this relation-
ship.
CT: Has there been a big differ-
ence between your system per-
formance in testing and real-market
performance? Have there been any
“surprises”?
TS: Not really, other than the cor-
relation issues I mentioned. Living
in Europe and trying to work
European day-time hours, I’ve
noticed the most unanticipated,
costly part of my trading is when I
need to roll commodity contracts in
very thin markets.
But because trading forex doesn’t
have that issue, the results have
been mostly as expected. Some-
times there can be discrepancies in
the data, because there is no single
correct data feed in forex trading,
January 2010 • CURRENCY TRADER
but profits and losses work both ways, and I have a few
simple rules for dealing with that.
CT: What unique ideas or tactics do you think you use?
TS: In terms of the currency trading, I don’t think I do any-
thing unique and different from other trend-following cur-
rency traders. That said, as a trend follower, you need to be
more patient than most people. Trend following can be real-
ly dull, so if you like action-packed days, trend following is
not for you. I guess my main tactic is to be patient.
CT: Okay, so how do you “compete,” so to speak, with other
trend-followers?
TS: That’s a good question; let me answer it in two parts.
First, [I compete] simply by not going broke. I mentioned
how I took a big hit early on because of misjudging how the
markets could correlate against me. Well, many trend-fol-
lowing currency traders did the same without learning the
lesson from it — they continued to trade too big and subse-
quently went out of business with 60- to 70-percent losses,
among them a rather famous outfit that was frequently a
top-ranked CTA in the currency sector.
Second, it’s a slow process, during which you have to
make any prospective investors aware of the fact you’re
capable of producing a slightly better risk-adjusted return
than most other trend followers. Unfortunately, this process
can take several years before it becomes really obvious, dur-
ing which time you just have to refrain from trying to swing
for the fences.
It all goes back to what you asked about money manage-
ment. Building a trend-following system is easy; being com-
petitive long-term demands deep, rigorous research in com-
plex money management.
CT: Do you have any program targets — risk-adjusted
reward, etc.?
TS: No goals or targets of any kind for the actual trades —
it’s just a matter of letting the markets do what they do, and
following them with a trailing stop. Estimated long-term
performance targets would be around 15 percent per year,
preferably with a Sharpe ratio around 0.7 or so.
CT: What was it like dealing with the market disruption dur-
ing the financial crisis last year and earlier this year?
TS: The last five to six months of 2009 were very dull.
Following a strong May and June, a bunch of whipsaw
trades put many currency and commodity trend followers
in drawdowns, and I’m no exception. At the end of October
I was down 1.8 percent for the year; I think Barclay’s cur-
rency trader’s index was up less than 1 percent.
In 2008, I was up 5 percent, after a strong comeback in the
second half of the year, following the correlation-related
drawdown I mentioned earlier. From the drawdown bot-
CURRENCY TRADER • January 2009
I need to internalize only two facts
about a system: that I understand
and accept the logic behind it, and
that it has a positive mathematical
expectancy.
tom I’m up 42 percent over the past 18 months. So, from fall
2008 to spring 2009 — which most people probably think of
as the most negative period, because that’s when the stock
market tanked the most — I was doing really well, thanks
first to a couple of good long-dollar trades, and then, when
the markets reversed, a couple of short-dollar trades.
On top of that I had a natural long-dollar position relative
the Swedish krona because my account equity is in U.S. dol-
lars. In fact, the results of many trend-following currency
and commodity traders over this period are a good
reminder that there are plenty of opportunities, even in
what seems like the darkest times. You just have to look a
bit further than news headlines.
CT: What’s the most important thing to consider as a
trader?
TS: To me, it’s important to understand that as a trend fol-
lower, you have to learn to let both the good and bad times
slide, and try to remain zen about the whole thing. Since it’s
supposed to be a statistics game, including both good and
bad outliers, I think it would be devastating to pick a few
good trades and try to model your systems around them.
That would only result in a system too curve-fitted to those
instances, which would be terrible to trade forward in real
time; likewise if you try to build a system avoiding a few
large losers.
I actually work quite hard at avoiding knowing too much
about the nitty-gritty about my systems, during both real
trading and research. Regarding the system itself, I need to
internalize only two facts: that I understand and accept the
logic behind it, and that it has a positive mathematical
expectancy.
On a trade-by-trade basis — regardless of the actual out-
come of the trade — all I need to ask myself is, did I do what
I was supposed to do? Probably the best setup you can have
as a trend follower is a string of losing trades in the same
market in the same direction. You just need to place the next
trade the same way. Right now, for example, I’m making
some money in the yen, but other than that I have two to
three losers in a row in everything else. But I trust the math-
ematical expectancy will work in my favor in the end.
33
 CURRENCY FUTURES SNAPSHOT as of Dec. 29

The information does NOT constitute trade signals. It is intended only to provide a brief synopsis of each market’s liquidity, direction, and levels of momentum and volatility.
See the legend for explanations of the different fields.

Market Symbol Exchange Volume OI 10-day move/% rank 20-day move/% rank 60-day move/% rank Volatility ratio/rank
Eurocurrency EC CME 249.4 148.7 -2.00% / 31% -4.28% / 87% -1.62% / 54% .30 / 48%
British pound BP CME 100.7 80.1 -2.44% / 90% -3.20% / 55% -0.11% / 2% .51 / 67%
Japanese yen JY CME 94.5 110.4 -3.61% / 77% -6.13% / 100% -2.54% / 100% .38 / 68%
Australian dollar AD CME 84.4 102.5 -2.24% / 47% -2.77% / 53% 3.20% / 8% .25 / 57%
Canadian dollar CD CME 77.7 80.8 1.58% / 82% 1.33% / 26% 3.80% / 40% .49 / 92%
Swiss franc SF CME 55.0 43.5 -0.48% / 13% -2.92% / 76% -0.23% / 18% .18 / 12%
Mexican peso MP CME 24.4 102.9 -1.52% / 70% -1.10% / 71% 4.86% / 84% .40 / 33%
U.S. dollar index DX ICE 16.1 40.7 1.89% / 24% 4.34% / 86% 1.76% / 91% .31 / 67%
New Zealand dollar NE CME 7.0 19.3 -1.08% / 22% 0.22% / 0% 0.28% / 0% .28 / 72%
E-Mini eurocurrency ZE CME 3.1 2.4 -2.00% / 31% -4.28% / 87% -1.62% / 54% .30 / 47%

Note: Average volume and open interest data includes both pit and side-by-side electronic contracts (where applicable).

Managed money: Barclay Trading Group’s

LEGEND:
currency trader rankings for November 2009
Volume: 30-day average daily volume, in thou-
sands. Top 10 currency traders managing more than $10 million
as of Nov. 30, ranked by November 2009 return.
OI: 30-day open interest, in thousands.
2009 $ Under
10-day move: The percentage price move from Nov. YTD mgmt.
the close 10 days ago to today’s close. Rank Trading advisor return return (millions)
20-day move: The percentage price move from 1. Dacharan Capital (High Exposure) 10.51% 33.53% 11.0
the close 20 days ago to today’s close. 2. Friedberg Co. Mgt. (Curr.) 6.74% -36.13% 60.7
60-day move: The percentage price move from 3. Cambridge Strategy (Emerging Mkts) 4.81% 26.62% 60.0
the close 60 days ago to today’s close. 4. MIGFX Inc (Retail) 3.22% 5.85% 10.5
5. IKOS G10 Currency Fund 2.84% 17.69% 498.7
The “% rank” fields for each time window (10-
6. Hathersage (Long Term Currency) 2.83% -8.50% 511.4
day moves, 20-day moves, etc.) show the per-
7. QFS Asset Mgt (QFS Currency) 2.82% 16.85% 619.0
centile rank of the most recent move to a certain
8. Sunrise Cap'l Partners (Currency Fund) 2.33% 0.11% 20.9
number of the previous moves of the same size
and in the same direction. For example, the % 9. Cambridge Strategy (Asian Mrkts) 2.16% 1.29% 270.0
rank for the 10-day move shows how the most 10. Metro Forex Inc (Tri Gl FX) 2.01% 18.04% 114.6
recent 10-day move compares to the past twenty
10-day moves; for the 20-day move, it shows how Top 10 currency traders managing less than $10 million and more than
the most recent 20-day move compares to the $1 million as of Nov. 30, ranked by November 2009 return.
past sixty 20-day moves; for the 60-day move, it 1. D2W Capital Mgmt (Radical Wealth) 30.10% 181.60% 2.7
shows how the most recent 60-day move com- 2. Rove Capital (Dresden) 5.39% 21.36% 2.2
pares to the past one-hundred-twenty 60-day 3. QuantFX AM (Managed Account) 2.30% 23.85% 1.8
moves. A reading of 100% means the current 4. H3 Global Advisors (Currency) 1.53% -7.05% 3.0
reading is larger than all the past readings, while
5. Sagacity (HedgeFX100) 1.43% 32.40% 1.5
a reading of 0% means the current reading is
6. Aurapoint Asset Mgmt. (Broadbeach) 1.24% 50.72% 1.8
smaller than the previous readings.
7. Overlay Asset Mgmt. (Emerging Mkts) 1.06% 5.14% 6.6
Volatility ratio/% rank: The ratio is the short-term 8. Quant Trading (FX Quant 11) 0.98% 16.30% 4.1
volatility (10-day standard deviation of prices)
9. Aurora Futures Corp (FX) 0.64% -2.95% 1.8
divided by the long-term volatility (100-day stan-
10. Armytage AAM (Trading 1) 0.45% 13.88% 4.0
dard deviation of prices). The % rank is the per-
Source: BarclayHedge (www.barclayhedge.com). Based on estimates of the composite of all accounts or the
centile rank of the volatility ratio over the past 60
fully funded subset method. Does not reflect the performance of any single account.
days. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE.

34 January 2010 • CURRENCY TRADER

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 INTERNATIONAL MARKETS
CURRENCIES (vs. U.S. DOLLAR)
Current
price vs. 1-month 3-month 6-month 52-week 52-week Previous
Rank* Country Currency U.S. dollar gain/loss gain/loss gain/loss high low rank

1 Canadian dollar 0.95275 1.49% 3.94% 9.83% 0.9795 0.7653 14

2 Chinese yuan 0.14665 0.14% 0.14% 0.24% 0.14665 0.1455 9

3 Indian rupee 0.02135 0.00% 3.14% 3.64% 0.02185 0.01858 6

4 Hong Kong dollar 0.12895 -0.04% -0.08% -0.08% 0.1291 0.1288 7

5 South African rand 0.13285 -0.23% -1.52% 4.85% 0.1383 0.09322 16

6 Russian ruble 0.0339 -0.29% 1.95% 5.61% 0.03524 0.02695 3

7 Taiwanese dollar 0.031 -0.32% 0.49% 2.14% 0.03138 0.02835 8

8 Thai baht 0.02995 -0.33% 0.67% 2.04% 0.03018 0.02712 2

9 New Zealand dollar 0.7059 -0.50% -1.85% 9.36% 0.7635 0.4892 17

10 Brazilian real 0.56725 -1.06% 2.04% 10.31% 0.5882 0.3999 13

11 Singapore dollar 0.7101 -1.47% 0.56% 3.28% 0.7256 0.6 4

12 Australian dollar 0.8844 -2.21% 1.88% 9.55% 0.9405 0.6247 10

13 Swiss franc 0.96615 -2.56% -0.73% 4.67% 1.0087 0.8353 11

14 British pound 1.5955 -2.88% 0.01% -3.45% 1.7042 1.3501 5

15 Swedish krona 0.13765 -3.54% -4.44% 7.29% 0.148 0.1068 15

16 Euro 1.4383 -3.72% -2.10% 2.32% 1.5144 1.2455 12

17 Japanese yen 0.01095 -5.60% -1.79% 4.29% 0.01179 0.00986 1

As of Dec. 28 *based on one-month gain/loss

ACCOUNT BALANCE
Rank Country 2008 Ratio* 2007 2009+ Rank Country 2008 Ratio* 2007 2009+
1 Norway 88.008 19.478 61.811 51.41 13 Belgium -12.891 -2.547 7.772 -4.455
2 Singapore 26.983 14.831 39.209 20.501 14 Czech Republic -6.669 -3.083 -5.483 -4.075
3 Hong Kong 30.621 14.219 25.529 22.288 15 Italy -78.812 -3.406 -51.208 -52.42
4 Sweden 37.279 7.783 39.054 25.403 16 Australia -46.605 -4.599 -57.305 -29.89
5 Netherlands 65.746 7.497 59.598 55.648 17 U.S. -706.068 -4.889 -726.572 -369.787
6 Germany 235.257 6.405 250.263 94.248 18 Ireland -13.886 -5.189 -13.876 -3.925
7 Taiwan 24.894 6.361 32.975 28.216 19 Spain -153.665 -9.592 -144.435 -86.701
8 Japan 157.079 3.199 210.967 96.891
Totals in billions of U.S. dollars
9 Switzerland 12.065 2.412 43.032 29.731 *Account balance in percent of GDP +Estimate
10 Canada 7.606 0.507 14.53 -34.309 Source: International Monetary Fund, World Economic Outlook
11 Korea -6.406 -0.69 5.876 26.979 Database, October 2009.
12 UK -46.457 -1.733 -75.483 -44.735

36 January 2010 • CURRENCY TRADER

 NON-U.S. DOLLAR FOREX CROSS RATES
Currency 1-month 3-month 6-month 52-week 52-week
Rank pair Symbol Dec. 28 gain/loss gain/loss gain/loss high low Previous
1 Canada $ / Yen CAD/JPY 87.06 7.36% 5.94% 5.43% 90.3149 70.6656 20
2 New Zeal $ / Yen NZD/JPY 64.5 5.24% 0.03% 4.96% 69.5573 45.12 21
3 Aussie $ / Yen AUD/JPY 80.925 3.58% 3.94% 5.28% 85.314 46.508 17
4 Franc / Yen CHF/JPY 88.28 3.08% 1.14% 0.47% 91.549 75.396 18
5 Pound / Yen GBP/JPY 145.815 2.75% 1.92% -7.31% 163.057 118.782 16
6 Canada $ / Real CAD/BRL 1.6797 2.59% 1.79% -0.44% 1.9871 1.6003 14
7 Euro / Yen EUR/JPY 131.52 1.91% -0.15% -1.71% 139.2 112.045 19
8 Aussie $ / Franc AUD/CHF 0.91545 0.37% 2.63% 4.66% 0.9462 0.728 11
9 Pound / Franc GBP/CHF 1.65095 -0.35% 0.72% -7.79% 1.8112 1.512 4
10 Pound / Aussie $ GBP/AUD 1.80395 -0.69% -1.84% -11.86% 2.2902 1.7438 5
11 Euro / Pound EUR/GBP 0.9024 -0.76% -2.00% 6.08% 0.9804 0.8399 15
12 Euro / Franc EUR/CHF 1.4897 -1.13% -1.31% -2.19% 1.5483 1.4575 12
13 Aussie $ / Real AUD/BRL 1.55925 -1.15% -0.23% -0.69% 1.6702 1.4741 9
14 Euro / Aussie $ EUR/AUD 1.6275 -1.48% -3.82% -6.52% 2.07 1.5947 13
15 Aussie $ / New Zeal $ AUD/NZD 1.2532 -1.68% 3.81% 0.21% 1.2939 1.1742 2
16 Euro / Real EUR/BRL 2.5366 -2.66% -4.09% -7.21% 3.4055 2.5382 10
17 Aussie $ / Canada $ AUD/CAD 0.92835 -3.64% -1.98% -0.24% 0.9895 0.7812 6
18 Franc / Canada $ CHF/CAD 1.01405 -4.00% -4.51% -4.69% 1.1583 0.999 7
19 Pound / Canada $ GBP/CAD 1.6746 -4.31% -3.79% -12.09% 1.9173 1.6344 3
20 Yen / Real JPY/BRL 0.0193 -4.46% -3.26% -5.62% 0.027 0.01868 1
21 Euro / Canada $ EUR/CAD 1.5102 -5.11% -5.78% -6.80% 1.7263 1.5048 8
GLOBAL STOCK INDICES
1-month 3-month 6-month 52-week 52-week
Rank Country Index Dec. 28 gain/loss gain/loss gain/loss high low Previous
1 Japan Nikkei 225 10,634.23 13.79% 6.24% 8.70% 10,767.00 7,021.28 15
2 France CAC 40 3,947.15 7.26% 3.19% 23.59% 3,951.78 2,465.46 11
3 Germany Xetra Dax 6,002.92 6.70% 4.65% 22.88% 6,011.28 3,588.89 7
4 Italy FTSE MIB 23,302.56 6.27% -0.75% 22.03% 24,559 12,332 13
5 Mexico IPC 32,610.51 5.34% 10.91% 33.25% 32,724.80 16,756.70 8
6 Switzerland Swiss Market 6,591.00 5.27% 4.80% 21.08% 6,608.60 4,235.00 10
7 UK FTSE 100 5,437.60 4.76% 5.26% 26.63% 5,437.60 3,460.70 4
8 Singapore Straits Times 2,855.68 4.52% 8.61% 23.24% 2,862.85 1,455.47 6
9 Australia All ordinaries 4,856.70 2.99% 3.84% 25.09% 4,897.50 3,090.80 14
10 U.S. S&P 500 1,127.78 2.93% 6.10% 21.63% 1,130.38 666.79 1
11 South Africa FTSE/JSE All Share 27,655.20 2.83% 10.65% 23.99% 27,888.90 18,120.69 9
12 India BSE 30 17,401.56 2.81% 3.26% 17.69% 17,457.30 8,047.17 5
13 Canada S&P/TSX composite 11,701.81 2.22% 3.20% 11.69% 11,802.40 7,479.96 3
14 Brazil Bovespa 67,902.00 1.28% 10.74% 30.24% 69,785.00 35,722.00 2
15 Hong Kong Hang Seng 21,480.22 -1.56% 4.33% 15.93% 23,099.60 11,344.60 12
GLOBAL SHORT-TERM INTEREST RATES
Country Interest rate Rate (%) Last change June 09 Dec. 08
U.S. Fed funds rate 0-0.25 0.5 (Dec. 08) 0-0.25 0-0.25
Japan Overnight call rate 0.1 0.2 (Dec. 08) 0.1 0.1
Eurozone Refi rate 1 0.25 (May 09) 1 2.5
UK Repo rate 0.5 0.5 (March 09) 0.5 2
Canada Overnight funding rate 0.25 0.25 (April 09) 0.25 1.5
Switzerland 3-month Swiss Libor 0.25 0.25 (March 09) 0.25 0.5
Australia Cash rate 3.75 0.25 (Dec. 09) 3 4.25
New Zealand Cash rate 2.5 0.50 (April 09) 2.5 5
Brazil Selic rate 8.75 0.5 (July 09) 9.25 13.75
Korea Overnight call rate 2 0.5 (Feb. 09) 2 3
Taiwan Discount rate 1.25 0.25 (Feb. 09) 1.25 2
India Repo rate 4.75 0.25 (April 09) 4.75 6.5
South Africa Repurchase rate 7 0.5 (Aug. 09) 7.5 11.5
GLOBAL BOND RATES
Rank Country Rate Dec. 28 1-month 3-month 6-month High Low Previous
1 UK Short sterling 99.31 0.08% -0.18% 0.42% 99.52 98.01 2
2 Japan Government Bond 139.36 -0.38% 1.21% 0.04% 140.32 135.45 5
3 Australia 10-year bonds 94.31 -0.51% -0.50% -0.11% 96.16 94.14 4
4 Germany BUND 121.42 -1.40% -0.12% 0.38% 126.53 117.47 1
5 U.S. 10-year T-note 115.52 -4.59% -2.26% -0.76% 127.62 112.90 3

CURRENCY TRADER • January 2010 37

 INTERNATIONAL MARKETS

Gross Domestic Product*

Release 1-year Next Release 1-year Next
Period date Change change release Period date Change change release
AMERICAS AFRICA
Argentina Q3 12/18 -0.4% -0.4% 3/17 S. Africa Q3 11/24 -12.2% -21.8% 2/23
Brazil Q3 12/10 1.3% -1.2% 3/11
Canada Q3 11/30 0.8% -6.6% 3/1 ASIA AND SOUTH PACIFIC
EUROPE Australia Q3 12/16 0.2% -2.5% 3/3
France Q3 11/13 0.3% -1.9% 2/12 Hong Kong Q3 11/13 -7.8% -2.0% 2/24
Germany Q3 11/13 1.5% -2.9% 2/12 India Q3 11/30 3.3% 8.8% 2/26
UK Q3 12/22 1.1% -3.1% 1/26 Japan Q3 11/17 -0.1% -0.3% NLT 2/28
Singapore Q3 11/26 0.3% 0.6% NLT 2/19
* Final estimates, at current prices, seasonally adjusted

Unemployment
Release 1-year Next Release 1-year Next
Period date Rate Change change release Period date Rate Change change release
AMERICAS
Argentina Q3 12/14 9.1% 0.3% 1.3% 3/15 ASIA AND SOUTH PACIFIC
Brazil Nov. 12/26 7.4% -0.1% -0.2% 1/28 Australia Nov. 12/10 5.7% 0.0% 1.2% 1/14
Canada Nov. 12/4 8.5% -0.1% 2.1% 1/8 Hong Kong Sept.-Nov 12/17 5.1% -0.1% 1.3% 1/19
EUROPE Japan Nov. 12/25 5.2% 0.1% 1.2% 1/29
France Q3 12/10 9.1% 0.0% 1.7% 3/4 Singapore Q3 10/30 3.4% 0.1% 1.1% 1/29
Germany Oct. 12/1 7.5% -0.1% 0.4% 1/5
UK Aug.-Oct. 12/8 7.9% 0.0% 1.9% 1/20

CPI
Release 1-year Next Release 1-year Next
Period date Change change release Period date Change change release
AMERICAS AFRICA
Argentina Nov. 12/11 0.8% 7.1% 1/13 S. Africa Oct. 11/25 0.0% 5.9% 12/15
Brazil Nov. 12/9 0.4% 4.2% 1/13
Canada Nov. 12/17 0.6% 1.0% 1/20 ASIA AND SOUTH PACIFIC
EUROPE Australia Q3 10/28 1.0% 1.3% 1/27
France Nov. 12/15 0.1% 0.4% 1/13 Hong Kong Nov. 12/21 0.1% 0.5% 1/21
Germany Nov. 12/9 -0.1% 0.4% 1/14 India Oct. 11/30 1.2% 11.5% 12/31
UK Nov. 12/15 0.3% 1.9% 1/19 Japan Nov. 12/25 -0.2% -1.9% 1/29
Singapore Nov. 12/23 0.2% -0.2% 1/25

PPI
Release 1-year Next Release 1-year Next
Period date Change change release Period date Change change release
AMERICAS AFRICA
Argentina Nov. 12/11 0.9% 8.5% 1/13 S. Africa Nov. 12/17 0.8% -1.2% 1/28
Brazil Nov. 12/8 -0.1% -4.6% 1/7
Canada Oct. 11/30 -0.3% -6.3% 1/5 ASIA AND SOUTH PACIFIC
EUROPE Australia Q3 10/26 0.1% 0.2% 1/25
France Nov. 12/22 0.2% -4.5% 2/1 Hong Kong Q4 12/14 0.1% -2.0% 3/12
Germany Nov. 12/18 0.1% -5.9% 1/20 India Nov. 12/11 1.3% 4.8% 1/7
UK Nov. 12/11 0.2% 2.9% 1/8 Japan Nov. 12/10 0.1% -4.9% 1/14
Singapore Nov. 12/29 1.7% 5.6% 1/29

LEGEND:
Change: Change from previous report release. NLT: No later than. Rate: Unemployment rate.
As of Dec. 30.

38 January 2010 • CURRENCY TRADER

 GLOBAL ECONOMIC CALENDAR MONTH
JANUARY/FEBRUARY
Legend
CPI: Consumer price index
January
ECB: European Central Bank 1 21 U.S.: December leading indicators
FDD (first delivery day): The Hong Kong: December CPI
first day on which delivery of a 2
commodity in fulfillment of a
3 22 Mexico: December
futures contract can take place.
employment report; January CPI
FND (first notice day): Also
4 December ISM report
known as first intent day, this is 23
the first day on which a clearing- 5 Canada: November PPI
house can give notice to a buyer
Germany: November employment
24
of a futures contract that it
intends to deliver a commodity in report 25 Australia: Q4 PPI
fulfillment of a futures contract.
The clearinghouse also informs 6 26 Japan: Bank of Japan
the seller. interest-rate announcement
FOMC: Federal Open Market
7 Japan: December CPI and PPI
Committee UK: Bank of England interest-rate 27 U.S.: FOMC interest-rate
GDP: Gross domestic product announcement announcement
ISM: Institute for supply Australia: Q4 CPI
management 8 U.S.: December employment
South Africa: December CPI
LTD (last trading day): The final report
day trading can take place in a UK: December employment 28 U.S.: December durable goods
futures or options contract. report; December PPI Brazil: December employment
PMI: Purchasing managers LTD: January currency options report
index
Germany: December employment
PPI: Producer price index 9
report
Economic Release time 10 South Africa: December PPI
release (U.S.) (ET)
GDP 8:30 a.m. 11 29 U.S.: Q4 GDP (advance) and
CPI 8:30 a.m. employment cost index
ECI 8:30 a.m. 12 U.S.: November trade balance
Canada: December PPI
PPI 8:30 a.m.
ISM 10:00 a.m.
13 France: December CPI Japan: December employment
Unemployment 8:30 a.m. 14 U.S.: December retail sales report and CPI
Personal income 8:30 a.m. Australia: December employment
Durable goods 8:30 a.m.
30
report
Retail sales 8:30 a.m. 31
Trade balance 8:30 a.m. Germany: December CPI
Leading indicators 10:00 a.m. Japan: December PPI
ECB: Governing council
JANUARY 2010 interest-rate announcement
27 28 29 30 31 1 2 February
15 U.S.: December CPI
3 4 5 6 7 8 9 1 U.S.: December personal income;
10 11 12 13 14 15 16 16 January ISM report
17 18 19 20 21 22 23 France: December PPI
17
24 25 26 27 28 29 30
18 2
31 1 2 3 4 5 6
19 Canada: Bank of Canada
3
FEBRUARY 2010
interest-rate announcement 4
31 1 2 3 4 5 6
UK: December CPI
7 8 9 10 11 12 13 5 U.S.: January employment report
14 15 16 17 18 19 20 20 U.S.: December PPI and housing Canada: January employment
starts report
21 22 23 24 25 26 27
Canada: December CPI
28 1 2 3 4 5 6
Germany: December PPI
The information on this page is Hong Kong: October-December
subject to change. Currency Trader is employment report
not responsible for the accuracy of
calendar dates beyond press time. UK: November employment report

CURRENCY TRADER • January 2010 39

 KEY CONCEPTS
Carry trades involve buying (or lending) a currency
with a high interest rate and selling (or borrowing) a cur-
rency with a low interest rate. Traders looking to “earn
carry” will buy a high-yielding currency while simultane-
ously selling a low-yielding currency.
True range (TR): A measure of price movement that
accounts for the gaps that occur between price bars. This
calculation provides a more accurate reflection of the size of
a price move over a given period than the standard range
calculation, which is simply the high of a price bar minus
the low of a price bar. The true range calculation was devel-
oped by Welles Wilder and discussed in his book New
Concepts in Technical Trading Systems (Trend Research, 1978).
EVENTS
Event: Oxford Club’s 2nd Annual
Caribbean Wealth Cruise
Date: Jan. 23-30
Location: Crystal Symphony, Miami to Aruba
For more information: Go to
www.moneyshow.com/events/Investment_Cruises.asp
Event: International Traders Expo
Date: Feb. 14-17
Location: Marriott Marquis Hotel, New York, N.Y.
For more information: www.tradersexpo.com
Event: 26th Annual Risk Management Conference
Date: March 7-9
Location: The Ritz-Carlton Golf Resort, Naples, Fla.
For more information: Visit www.cboe.com/rmc
Event: 35th Annual International
Futures Industry Conference
Date: March 10-13
Location: Boca Raton Resort & Club, Fla.
For more information: Go to www.futuresindustry.org
40
True range can be calculated on any time frame or price
bar — five-minute, hourly, daily, weekly, etc. The following
discussion uses daily price bars for simplicity. True range is
the greatest (absolute) distance of the following:
1. Today’s high and today’s low.
2. Today’s high and yesterday’s close.
3. Today’s low and yesterday’s close.
Average true range (ATR) is simply a moving average of
the true range over a certain time period. For example, the
five-day ATR would be the average of the true range calcu-
lations over the last five days.
Event: The 17th Forbes Cruise for Investors
Date: March 18-30
Location: Crystal Symphony, Sydney to Auckland
For more information: Go to
www.moneyshow.com/events/Investment_Cruises.asp
Event: The World MoneyShow Vancouver 2010
Date: April 6-8
Location: Hyatt Regency Vancouver
For more information: Go to
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Event: FIA/FOA International Derivatives Expo
Date: June 8-9
Location: The Brewery, Chiswell Street, London
For more information: Go to www.idw.org.uk
Event: Los Angeles Traders Expo
Date: June 9-12
Location: Pasadena Convention Center, Los Angeles
For more information: Go to
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Event: The Forex & Options Expo Las Vegas 2010
Date: Sept. 12-14
Location: Caesars Palace, Las Vegas
For more information: Go to www.moneyshow.com
January 2010 • CURRENCY TRADER
 GLOBAL MARKETS continued from p. 11

FIGURE 8 — ROOM TO MOVE

“These are all fast growing countries where Some analysts say that although a significant CNY revaluation is
the currencies are cheap or the governments unlikely in the next six months, there is room for the yuan to strengthen
have been intervening,” he says. “Allowing the vs. the dollar — i.e., the USD/CNY rate could decline.
[Indian] currency to appreciate is one of the
most efficient ways to keep inflation down.”
Galy highlights the Korean won (KRW),
along with the Indonesia rupee (INR), and the
Israeli shekel (ILS) as currencies with potential
in 2010. He calls the Korean won “cheap” with
room for upside appreciation in 2010 (Figure 7).

“In addition to staying long the KRW against

the USD, where intermittent volatility can be
expected should risk aversion rear its head
again, as it surely will, we favor cross-regional
currency plays, including buying KRW against
JPY, a clear winner in 2009,” BNP analysts
wrote in their report. Source: www.advfn.com
Galy says a pick-up in inflation in Indonesia
and Israel could spark central bankers there to soon, though.
“solve it by tightening policy and letting the currency “Beijing has made it very clear its stable CNY policy will
appreciate.” continue until it is more confident in an export-led Chinese
BNP analysts wrote: “Our general view on the Israeli recovery,” Webster adds. “Nor will it relent to internation-
shekel is that of an undervalued currency on the basis of the al pressures short-term to increase FX flexibility to help cor-
country’s highly supportive balance of payments. We rect global imbalances. In other words, China’s policymak-
expect the shekel to strengthen more noticeably in 2010, ers are still acutely sensitive to the view that, independent
especially in times of a rise in global volatility. The Israeli of government/central bank stimulus, private-sector driven
economy has been by all means outperforming that of Chinese output is likely to continue to fall short of sustained
many emerging markets countries during the credit crisis growth recovery.”
partly thanks to a strong local banking sector.” As a result, Webster says, a “de-pegging” or meaningful
Many emerging-markets countries, including Indonesia, CNY revaluation is unlikely to occur within the next six
Korea, and India, have increased their reserves to help months, or until China has regained some competitive edge
prevent steep appreciation of their currencies. However, over newly industrialized Asian economies. But there is
Englander says that trend could be changing and EM coun- room for the yuan to strengthen vs. the dollar.
tries might intervene less. “Nevertheless, as far as USD/CNY is concerned, the U.S.
“As inflation becomes more of a concern, the benefits of currency might be seen easing from current levels of
keeping an artificially weak currency diminish and the around 6.82 to around the 6.60 mark by end of 2010,” he
advantages of currency strength grow,” he says. says. “If this sort of move occurs, almost all of the softening
is likely to occur in the second half of the year.”
China
Stephen Webster, director of UK-based TopEcon consult- Back to normal?
ing, believes the Chinese yuan (CNY) is a key currency to Overall, 2010 appears poised to see the return of several key
watch in 2010 (Figure 8), despite its continued “managed forex market drivers — refocusing on interest-rate and
float” vs. a small basket of currencies (dominated by the growth differentials, and a de-emphasis of the dollar as a
U.S. dollar). funding currency for carry trades in favor of the yen.
“Emerging Asia — Asia excluding Japan — is highly “I think the big risk-on, risk-off theme that dominated
dependent on China as a destination for its exports, and FX 2009 is probably not going to be nearly as important,”
linkages in the region are pivotal in this respect,” he says. Englander says. Instead, currency traders and money man-
“For example, Taiwan and South Korea are particularly agers will be focusing on which countries will come back to
export dependent on China. The sheer scale of China’s a normal policy regime the quickest.
exports to the rest of the world also makes the CNY a cur- “The countries that can do that will have strong curren-
rency of clear international focus.” cies,” he says. “The laggards will continue to face pres-
Don’t expect a major policy shift from China any time sure.”

CURRENCY TRADER • January 2010 41

 NEW PRODUCTS & SERVICES
 Interactive Brokers has recently introduced a new
free iPhone application that allows users to view global
quotes across multiple asset classes including forex, stocks,
options, futures, and bonds. This application is available to
customers and non-customers. Customers have the added
feature of real-time trading and account monitoring capa-
bilities. The iTWS Application is available for free down-
load at the App Store. Users can also receive real-time price
alerts on currency pairs, stocks, and any electronically trad-
ed futures or options contract around the globe. Users can
view exchanged-delayed price data and charts and use a
range of IB’s market scanners to see what’s hot in today’s
market. Non-customers can also log into the iTWS demo
system to kick the tires and test the Trader Workstation soft-
ware. iTWS lets customers enter and manage orders, view
executions, and monitor account balances. Orders entered
using iTWS can still be made using SmartRouting technol-
ogy, which searches for the best price and routes and re-
routes all or part of orders to achieve optimal execution.
 CQG and Kyte Group, an independent Futures
Commission Merchant (FCM) offering clearing and execu-
tion services on the world's most prominent cash and deriv-
atives exchanges, have entered into a global software
licensing agreement to make CQG’s trading software avail-
able to its customers and internal trading desks.
The partnership with CQG, a trade execution, market
data, and analytics provider for global electronically traded
futures markets, allows Kyte Group to meet increased
demand for professional futures trading software from
banks, hedge funds, and professional traders. Customers
clearing through Kyte Group will have access to CQG’s
industry-leading electronic trading and decision-making
tools via the CQG Trader and CQG Integrated Client plat-
forms. Kyte Group traders will be able to route orders to
CME Globex, Eurex, ICE Futures UK, LIFFE, and SFE.
 Online trading platform trade MONSTER
(www.trademonster.com) now offers multiple screen tech-
nology using detachable windows. Customers can click
and “detach” a window during their trading session, leav-
ing it as a stand-alone window in a Web browser. This fea-
ture allows traders to maintain real-time streaming data on
every display and screen, detach watch lists and charts,
keep an eye on more of the market, and save personalized
layouts for maximum customization. The company has also
unveiled tradeLAB, a suite of analytical tools that allow
traders to instantly analyze option trades in visually intu-
itive and dynamic ways.
 Interactive Data Corporation has released
Market-QSM 3.2. This new version of Market-Q provides
upgraded features to track real-time streaming market data
42
directly from the Web, including advanced charting, alerts,
option chains, and Canadian fundamental market data.
Market-Q’s virtual desktop solution provides access to
information from any PC with all the benefits of a central-
ized enterprise desktop-management system. Users can
customize the alerts they receive either in their browser or
via email. In addition, users can set high and low limits on
a symbol; easily acknowledge, edit, or dismiss alerts; color
code alerts in the watch list; and track all alert activity in the
alert log. The option chains have been upgraded in Market-
Q 3.2, allowing users to display options based on key fea-
tures, including expiration date, strike price, strike range,
and standard and non-standard, as well as the ability to
drag and drop options symbols into another window.
Market-Q now displays Canadian fundamental market
data, providing users financial information on Canadian
companies including net house summary, block trades,
market movers, performance data, company profiles, ana-
lyst ratings, financial statements, valuation ratios, and
mutual fund profiles. Market-Q 3.2 also supports Nasdaq
Basic, which offers real-time quote and trade data for secu-
rities listed on the Nasdaq, NYSE, and AMEX exchanges at
a reduced rate. This tool provides a cost effective way to
receive the best bid and offer, associated size, and last sale
from the Nasdaq Market Center and the FINRA/Nasdaq
Trade Reporting Facility (TRF). For more information, visit
www.Market-Q.com.
 Quod Financial (www.quodfinancial.com), global
provider of adaptive trading execution technology, has pre-
loaded its Adaptive Smart Order Router (ASOR) with a
library of trading algorithms for better execution and lower
market impact. ASOR offers a range of algorithm classes,
including statistical-based algorithms that incorporate dif-
ferent historical analysis with the aim to minimize market
impact, and real-time statistics indicating where liquidity
resides and the quality of each venue; probabilistic-based
algorithms for incorporating diverse methods to seek out
hidden and non transparent liquidity; and mathematical
optimization methods for addressing complex decision-
making cases especially for highly fragmented markets.
ASOR can be used in conjunction with Quod Financial’s
Adaptive Cross to offer simultaneous access to internal and
external liquidity reducing the barriers to entry for inter-
nally crossing order flow to both tier I and tier II institu-
tions.
Note: New Products and Services is a forum for industry businesses to
announce new products and upgrades. Listings are adapted from press releas-
es and are not endorsements or recommendations from the Active Trader
Magazine Group. E-mail press releases to editorial@currencytradermag.com.
Publication is not guaranteed.
January 2010 • CURRENCY TRADER
 FOREX TRADE JOURNAL

Dollar/Canada fails to budge,

despite broader buck rally.

TRADE
Date: Wednesday, Dec. 16, 2009.

Entry: Long the U.S. dollar/Canadian dollar pair

(USD/CAD) at 1.0644.

Reason for trade/setup: This trade was based on

the combination of the U.S. dollar’s broader short-
term strength and the USD/CAD’s volatility contrac-
tion: a recipe for an upside breakout.
In retrospect, the trade from last month’s Forex
Journal was a victim of the USD/CAD’s
extended contraction, which persisted anoth-
er month before this trade presented itself.
With the pair nestled in an increasingly tight
congestion pattern, a breakout is only a mat-
ter of time. With the dollar index (DXY) hav-
ing successfully tested its November low and
broken out above the November high, arrows
are pointing higher.
With the market trading around 1.0610, we
bracketed it with a limit order below the mar-
ket at 1.0591 and a buy-stop order above at Source for all charts: TradeStation
1.0644 (a little above the afternoon high).
the morning after the entry. Unfortunately, it turned out to
Initial stop: 1.0591. be a classic fake-out. Price sagged over the next two days
(not without giving some false hope by pausing around the
Initial target: 1.0860. breakout level most of Dec. 18) before collapsing on Dec. 21
and stopping out the trade.
RESULT Meanwhile, the dollar soared overall, especially on Dec.
17, and followed through with solid, if unspectacular gains
Exit: 1.0591. over the next three days. Dollar/Canada retreated right
back into the middle of its trading range, which was two
Profit/loss: -.0053. months old at that point. 

Outcome: What a frustrating trade — the U.S. dollar
made big gains vs. most currencies during the holding peri-
od, but went nowhere vs. the Canadian buck.
The trade started out promisingly enough. The pair
didn’t pull back to the limit price, but triggered an entry at
the buy-stop level and followed through strongly to 1.0745
Note: Initial trade targets are typically based on things such as the historical per-
formance of a price pattern or a trading system signal. However, because indi-
vidual trades are dictated by immediate circumstances, price targets are flexible
and are often used as points at which to liquidate a portion of a trade to reduce
exposure. As a result, initial (pre-trade) reward-risk ratios are conjectural by
nature.

TRADE SUMMARY
Date Currency Entry price Initial stop Initial target IRR Exit Date P/L LOP LOL Trade length
pair Point %

12/17/09 USD/CAD 1.0644 1.0591 1.086 4.08 1.0591 12/21/09 -.0053 -0.50% .0101 -.0053 3 days

Legend: IRR: initial reward/risk ratio (initial target amount/initial stop amount). LOP: largest open profit (maximum available profit during
lifetime of trade). LOL: largest open loss (maximum potential loss during life of trade).

CURRENCY TRADER • January 2010 43

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